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6nt

HOWTO

USETHE

Three-Point Reyersal Method of

Pof,mt6

Sfock Market Trading

onraruAt rnte

)

ffi@ffiM'

ilETH0D0F p0tXT & FIOURETRADITO

BY

A. W.

GOHE]I

PUBL'ST]ED AV}

GHARTCRAFTIJIG.

LARGHM||JIT,JI.Y.

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HOW

TO USE

THE

Three-Point ReversalMethod of

I

I'

Pof,nt{P-(d-(L?

Sfock Market Trading

BY

A. W.

COHE]I

A TECIIIIICAI.APPR(IACHI|l ST(ICTilARI(IIIRIIIIIIG

PUBTISHEDBYCHARTCRAFTIilC.,TARCHII(l}IT,1I.Y.I0538

Copydght1968,1978,1982,&

-

19&4byChartcraft,[nc.

nrUtisneabyChartcraft,Inc.,Larchmont,NY Libraryof CongressCatalogueNumber:68-54093

EIGHTH REVISEDEDITION

The material contained herein is not to be taken asadvice to buy or sell

specific securities. The information

Ultieveto bereliableandhasbeencarefullycheckedfor completenessand accuracy,but cannotbeguaranteed.

presented is based on sourceswe

TABLE

OF

CONTENTS

Foreword

Introduction

Section One - The Poj.nt & Figure

The Point & Figure

Charting A Very

Chart Construction

Chart

Low-Priced

Chart

and Construction

Stock

The Double Top & Double Bottom Formation

(#1)

The Double Top & Double Bottom Formation The Bullish Signal Formation

(#2)

The Bearish

The Bullish & Bearish Symmetrical TriangLes

Signal Formation

The Triple

The Triple

Formations In Combination Variations On The Triple Top & Triple Bottom Formations . The Broadening Formation The SpreadTriple Top & Bottom Formations .

Bullish & Bearish Cataputt Formations . The Bearish & Bullish Signal Reversed F'ormations .

Top Formation

. Bottom Formation

.

Section Three

- Trend Lines

The Bullish Support Line The Bullish Resistance Line The Bearish Resistance Line The Bearish Support Line

Section Four

- Price

Objectives

Count

.

The Horizontal

The Vertical

Count

The Horizontal & Vertical Count

Section Five

- Relative

Section Six - Industry

Strength

Groups

.

Section Seven - The Dow-Jones

Section Eight

- Trading

Tactics

Establishing

Profitability

The Pu]lback

Profitability

Stoploss Orders

Taking

The Trade

Tables

Tables

Profits

Industrial

Average

Page

D

6

n

a

B

1

L2

1

1 5

1 6

1 8

20

2 2

24

2 6

2 B

30

3 2

34

3 6

3B

40

43

44

48

50

53

5 5

D b

5B

60

6 1

6 5

69

73

74

74

7 5

76

7 7

78

SectionEight (continued) StocksWith A High ShortInterest. Volume.

SectionNine - ConvertibleBonds.

SectionTen - Over-The-Counters.

SectionEleven - TechnicalIndicators TheCumulativeDaily Advance-DeclineLine . The High-LowIndex The On-BalanceVolumeIndex The Odd-Iot BalanceIndex TheOdd-LotShortSaleslndex The 10-DayAdvance-DeclineRatio . The 10-DayUpside-DownsideVolumeRatio The200-DayDJIA MomentumIndex TheDJIA One-YearToChart. TheIndexof SpeculativeConfidence TheGoldMining Disparitylndex The Short Interest Ratio . The % of NYSEStocksAboveTheir 10-WeekMoving Average' The lO-WeekMost Active StocksRatio TheNYSEBullish Percentage The DJIA Bullish Percentage. GeneralMotors asa BellwetherStock.

SectionTwelve - PutsandCalls.

SectionThirteen - Commodities.

SectionFourteen - Adjusting a Chartfor a StockSplit

SectionFifteen - TheS-PointReversalChart

-4-

80

80

E1

85

89

90

91

92

93

94

95

96

97

98

99

100

101

r02

103

104

105

106

107

113

125

126

-

FORWARD

Thebasicprinciplesof "How to Usethe Three-PointReversalMethod ofPoint & Figure StockMarket Trad- "Stock

"

Market Timing.

"The

ChartcraftMethod of Point & Figure Trading."

ing" wereftrst publishedin 1947under the trtle

When the ChartcraftWeekly Service

wasstartedin 1948,the nameof the bookwaschangedto

In August197E,wepublishedthe sixthrevisededitionof this bookwhichincludedrevisedchaptersdealingwith the Dow'JonesIndustrialAverage,Over-The-CounterStocks,and TechnicalIndicators.In March 1980,the

Seventheditionwaspublishedcontainingarevisedchapteron OptionTrading.

Thisis the eighthrevisededition.It containsrevisedsectionson PriceObjective,RelativeStrength,Tech- nicalIndicators,Options,andCommodities. Althoughfutureeditionsareconstantlyin the planning,the basicprinciplesremainthesame.

Specialacknowledgmentis madeto "Proft ProfessorRobertEarl Davisof PurdueUniversity.He waskind enough

to let us read his lengthy manuscript,

CommonStocks,'

containedin this book.All the formationswereprogrammedfor an IBM 7094computerandthe resultswere obtainedonthebasisof tradingfrom buysignalto sellsignal,andsellsignalto buy signal,with trend linestaken intoaccount,

and hobability-Technical

Analysis of the PriceFluctuations of

'

andhaspermittedusto usehisfiguresonthe profitpotentialof the varioustradingformations

A. W. Cohen July 1982

INTRODUCTION

- THE TWO APPROACHES

The problem of the purchase of stock in any particular

One way is to pose the problem as:

The other is to pose the problem

companycanbeapproached

I buy the stock of

"should

in either of two ways.

theXyZ

Companyi"

as: "When shall I buy the stock

of the XYZ ComPanY?"

who asks the question "Should I?"

is taking the

fundamental approach

"When shall I?"

is

The person

to the stock

taking the technical approach to stock market

market analysis.

The person who asks the question

analysis'

The fundamental quality of management, in the industry,. etc.

analyst

earnings,

concerns himself with financial statements, history,

dividends, popularity of products,

relative

position

The technical analyst concerns himself with suppiy and demand, accumulation

have substantial

as of

a

moves at one time or another'

"

No stock goes up

"blue chip"

"cat and dog.

its own accord.

Before a stock

goes up it goes

hands" into

through a period of accumu-

"strong

hands" until demand

Bef.ore a stock drops in price'

It is passing from supply overcomes

"insiders, rr it is passing from

handi"

into "weak hands.

"

"weak

"

When support is withdrawn,

"insiders.

by the same

downward move is on.

The tecbnical analyst is concerned with

and the right time to sell short.

supply or

He attempts to determine the

of the situation.

He is

"insiders"

an

demand has taken control

various

techniques to determine what the

are doing'

and distribution. Practicaliy all stocks

Fluctuation in price is as true of a

in price of trtio.r by

is greater than supply and the upward move is on its.way'

it goes through " p""ioA of distribution

"slrong

demand and the panicky

the right time to Uuy moment when either

,,outsider" making ,r"" oi

When should a stock be bought?

The broad answer to this question is that a

stocks egeneralmarketisinanuptrend,(2)theindustry

group

ffptrlnO,

the industry group

fJ.ow,growth,

question when to buY'

of which it is a member is in an uptrend,

and

(3)

the stock itself is in an uptrend.

as used herein, refers to price - the price of a market average, the price of

index, the price of tne stock.

It does not refer

to earnings,

cash

etc.; such factors may answer the question what to buv but never the

When should a stock be sold short ? The broad answer to this question is that

astockslrouIdu.@thegenera]marketisirradowntrend,(2)the

industry group in a downtrend.

should at Ieast be out of stocks in such a situation.

to.price and nothing else.

of which it is a member is in a downtrend,

and

(3) the stock itself is

The trader or investor who does not like the short side of the market

Here again, downtrend refers only

The tools used by the technical analyst in nraking

charts - charts of a particular

or Index.

stock, charts

such determinations are

of an industry group, charts of

and Point and

It

is

primarily

a market Average

Figure. This the oldest form

of the stock market,

clearest method of determining the right tinre to buy and the right tiure to sell. The

There are three types of charts: line, bar,

book is devoted to Point and Figure

of charting

and

charting and interpretation.

used in the stock market,

it is indigenous to and grew out

once n:astered and understood it is also the simplest and

Point and Figure chart shouts where other charts merely stutter.

-6-

SE C TION

ONE

THE POINT AND FIGURE CHART AND ITS

CONSTRUCTION

1,

By this,

changes. In the usual

In Figure

#

we have a Point and Figure

and horizontal

chart

"under

c o o r d i n a t e s

coordinates

coordinate

we mean that both vertical

line or bar chart,

the vertical

"

the aspect of eternity. are based on price

is based on price

and

the horizontaL coordinate is based on time

in a Point and Figure

concerns itself with is a stockrs price changes independent of the time in which these changes take place. The chart patterns that this chart develops are independent of the

time it takes for their eoming into being, whether it is a matter of days, weeks, months,

or years.

(day, week, or

monttr).

in

it.

This

is not the case

chart.

Chronology has no significance

for the future

remains

The only thing it

Their

significance

the same.

Although we will as wiLl be

include chronological

data in the body of the Point and Figure

to establish

a

chart,

frame of reference.

seen in the ensuing pages, this wilL be done merely

THE POINT AND FIGURE CHART

Figure # 2 is a reproduction of a Point and Figure chart of Bucyrus-Erie. us examine it closely and learn how it is constructed'

Each square ( not line) on the chart represents a unit of

price.

Under 20, each square stands for |-point

From

20 to 100, each square stands for

or one-half dollar.

1-point or one dollar.

Let

When the price of a stock is going up, we use Xs to indicate the price changes.

When the price of a stock is going down, we use 0s to indicate the price chatrges.

Vertical

columns of Xs and 0s alternate.

We n.roveone colutrln to the right

each time there is a change in direction - from up to down or from dorvnto up. Xs and

0s never appear

downmove, it

upmoves and downmoves and not closing prices).

in the same column.

Each colun.tnrepresents either an upnlove or a

(Daily highs and lo'tls ale used fol

determining

cannot represent both.

-8-

In no vertical

column are there ever less than 3 squares of Xs or

3 squares of 0s.

Thismeansthatinordertorecordacna@anupmovetoadownmove,

or vice versa,

there must first

be a price

change equal to at Ieast 3 squares.

Over

20, therefore,

a price

change of 3 points or three dollars

has gone up to 50, it

column.

would be necessary must go down to 47

for a trend reversal.

before we car record

If the

price of a stock

the 0s in the next vertical

Under 20, a reversal

of

1-j

points or one-and-one-half dollars would be neces-

sary.

record

If the price

of a stock has gone down to 14, it

the Xs in the next vertibd

column.

must go up to 15-| before we can

At the borderline of ,20t 3 squanes may represent only 2 ot

reversal

occupying 3 squares is drryays necessary.

2'l

points, but a

In the same trend,

down.

on lts

way up or

however,

each point or |-point

is added as the stock continues

Over the 20 price

square, we have'no fractions

at all on our chart.

If a stock has

gone up from

stoct<has gone down from

square (it never made an even 43).

32 to 39-?/8,

the highest X in our column will be in the 39 square.

57 to 43-1/B ttre lowest 0 in our

column will

If

be in the 44th

a

Under the 20 price

square)

the only fractions

we have are in |-point

units.

If

a

stock has gone rpi"orn tO-i to L3-7 18,

if it has gone down from 16 to 13-5/8, made an even 1g-*).

the highest X wilt be in the 13-|

the lowest 0 will

square; and

be in the 14 square (it never

Over

100, each square should represent

2 points or two dollars.

The 3 squares

necessary

for

a trend

reversal

will

therefore

stand for

6 points or

six dollars

except,

of course, at the borderline

of 100.

It

is

very

important

In the usual stock market

to indicate that a Point and Figure

chart,

chart is a one-dimen-

the vertical

sional chart.

represents

whether bar or line,

time.

axis

chart

price

and the horizontal

axis records

In the Point and Figure

both the vertical

may contain is of no importance only as a matter of convenience. passage of time by the numerals

and horizontal

a:<isrecord

price.

The chronological

data that it

either

to its construction

In the chart of Bucyrus-Erie,

or interpretation.

It

is

used

we have indicated the

L to L2 (1 representing

January,

2 representing

February, etu. ). The appropriate numeral has been substituted for an X or an 0 the

first time a price change is entered in a new month. When this coincides with a 3-box

price

may be. Years are indicated at the foot of the chart.

were omitted, the chart would be just as valid.

enous to the stock market;

as far back as the 1-880s. It is the oldest type of chart used in stock market

reversal,

the numeral

is entered in the third

square up or

down as the case

data

If all this chronological

The Point and Figure

record

price

chart is indig-

it was used to graphicaUy

changes, perhaps

trading.

Ttre Polnt

and Flgure

chart,

as

ne

have

rerrergal

necessary

for

a change

ln

dlrectLon,

moves.

It

18 eLople,

clear

and conclge.

It

constnrcted

lt,

becauee

elLmlnatee

all

mlnor

lends

ltself

easlly

to

terpretatlon.

It

18 sLnple

to

conatnrct

and malntaln.

of

and confuelng

the

3-box

correct

ln-

lfote:

Charts compiled by Electronic Computer substitute A,

B

and C for

11 and 12 as symbols for the months October,

November and December.

10,

-9-

Figure

#

3 is

a Point and Figure

chart of Union Carbide. and falls above 100.

of charting when the price of a stock rises

Below 100, each square stands for

1-point or one dollar.

It illustrates

the units

Above 100, each square stands for 2-points or two dollars.

A 3-box reversal

below 100, would be equal to 3-boxes or

three

dollars.

A 3-box reversal

above 100, would be equal to 6-points or six dollars.

At the borderline

of 100, the 3-box reversal

and at other tin-res5 dollars.

may sometimes equal 4 dollars

The important

fact to keep in mind is that above 100 we have only even units

and no odd units.

if a stock goes down to 107, the low on our chart would be 108.

Thus if a stock goes up to 115, the high on our chart would be 114;

In all other respects,

in Figure

#

2.

the chart is basically the same as that of Bucyrus-Er.ie,

-10-

CHARTING A VERY LOW-PRICED

STOCK

In discussing the charting of stocks under the price of $20.00,

we have laid

down the general rule that such stocks should be charted in Il2

point reversal.

this manner wiII not give any discernible chart patterns over long periods of time.

This is especially true of stocks under $5.00 that are not too active.

point units by a l-ll2

However,

there are occasions when charting very low-priced

stocks in

To overcome this defect, such a stock may be charted in smaller

units.

Each

square can be made to represent rection.

ll4

point with 3/4 point necessary for a change in di-

Such a chart is illustrated charting it in the smaller units,

time they are just as accurate and useful as the chart patterns appearing in stocks chart-

ed on larger units.

above.

It is a chart of Lehigh Valley Industries.

By

chart patterns appear more frequently and most of the

Once the price

gets above $5.00 then we go back to the standard 1/2 point unit.

CHART

CONSTRUCTION

The Point and Figure

chart of Bucyrus-Erie

was constructed from

the daily

stock tables appearing in the Wall Street Journal. Any newspaper reporting the daily highs and lows may be used. Because the 3-box reversal eliminates the minor and insignificant price changes, there is no need to subscribe to any special price change service in order to construct and maintain a chart of this type.

We are appending below the daily high and low figures of Bucyrus-Erie

for

the year 1961. We have also added a column showing the chart entries to be made from these figures. This rvill enable you to practice making a chart. We suggest that you cover the column marked chart entries and only use it to check your own postings. The figure after the colon represents eighths of a point; the figure in parenthesis represents the month, i. e., (i) January, (2) Februarv, etc.

 

Chort

Dote

High

Low

Entries

Jon.

3

t

4

l3:4

13t-14

4

14:7

13:7

(t)l4i

5

l5:4

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l5-l5l

6

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l5:6

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l

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15'4

16

20

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23

l6:2

15:7

24

16:2

l

6

25

l6:I

15:7

 

26

|5:7

15:4

27

l5:5

l5:4

30

|5:7

l5:4

3l

 

l5:6

l5:2

Feb.

I

l5.2

l

5

 

2

l5:6

l5:3

 

3

|5:4

15:2

 

6

l5:3

l5:I

7

l5:2

l4:7

 

I

l5:3

14:7

Y

l5:3

l

5

 

l

0

|5:2

l5:I

 

l

3

l5:3

l5:I

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l5t7

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l

5

l6:2

l5:6

l

6

17:4

l6:3

(2)16+-t7-t7l

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7

l8:3

l7:5

18

20

l9

r8

l8+-le

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Chort

Dote

!rs!

Low

Entries

 

21

19

l8:5

23

l8:6

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24

l8:4

l7:7

27

l8:6

l8:I

28

lP:4

l8:I

Mor.

I

l8z2

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2

l8:4

l8

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l8:3

l7:6

6

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1725

(3) le j

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2023

l9:2

20

8

20

19:4

9

20:3

20

 

l

0

20:7

2022

l

3

22

2l::2

2l-22

l

4

21:7

20.5

l

5

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6

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1 7

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203

2 1

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22

2 l

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23

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2024

24

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27

22:2

2l:7

28

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n

2l:7

2l:3

30

2l:7

2l:3

April

3

2lz 7

2123

4

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2 l

5

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20r4

6

20:I

19:6

7

19:7

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l8*

 

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2023

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19-19+-20

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April

1

2

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l3

?0

14

19:7

1

7

19z7

l8

l9:I

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2022

20

22:l

21

23

24

22:7

25

22:5

26

23:4

27

23zl

28

2227

Moy

I

23:I

2

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3

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4

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5

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24

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2

242

l

5 24:2

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22

24

23

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24

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25

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26

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June

I

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20

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Chort

Entries

19:6

l9:5

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l9:I

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2l:4

2l'22

22:3

23

2l:5

2l:6

22:3

22:l

22;1

22:6

22:5

22:3

2225

2223

22:7

(5)24

24

25

24:l

23:5

23:7

23:7

24

24

2326

2324

2326

23:4

2324

23:I

23zl

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23

2226

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2221

2t:5

24-23-(6)22

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2027

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20

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-13-

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Low

Chort

Entries

 

26

20:6

20

27

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28

2027

20

n

 

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20

30

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July

3

2025

202

5

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2023

2021

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20

 

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Chort

Dote

High

Low

Entries

Dote

Sept.

I

171.3

17:2

Nov.

I

5 17:3

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