The reversal parameter is usually double, or triple, the box size parameter. It’s always a multiple of the box size. Therefore the larger the box size the more vertical data can be incorporated into the chart. Large box sizes are useful when compiling long term charts. The horizontal component, the width of the chart, is determined by the size of the reversal. The larger the reversal size the fewer columns will be required. In the example below a box size of 5 has been used with a 3 box reversal, which is equivalent to a 15 point turn around.

Fig 94

Formations

All the classic formation techniques can be applied to a point & figure chart. In the example above there are two distinct formations. The first is an up sloping wedge, which gave rise to an uptrend line and a resistance level at 4245. This resistance turned into support after price had broken out to the upside.

The next formation is a flag, which established new support and resistance levels at 4265 and 4290. A breakout or a breakdown from this flag formation will issue an appropriate buy or sell signal. There’s a higher probability for the market to break out than breakdown given the formation is a bull flag. The bull flag has an up pole, a vertical move to higher prices preceding the flag.

You will notice the market popped up to 4295 in an attempt to breakout to higher prices, but this price probe above the flag was subsequently rejected. The initial signal is to go with the breakout and buy the market. However, failure to sustain the breakout and a move back into the flag formation negated the buy signal and in fact issued a new sell signal.

The sell signal is valid until the market either breaks out to higher prices or reaches the next support level. In this case, the support levels come first from the trendline, which cuts through at 4270. The next support occurs at the lower side of the flag formation at 4265.

A break of the trendline is unambiguous when using point & figure charts and in this case the sell signal was confirmed with a break of the support level at 4265, the lower side of the flag formation.

There was old resistance at 4245 from the first formation and that now becomes support.

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Craig MacLean is a Futures Adviser Licensed under the Australian Securities Commission, Corporations Law. The writer accepts no responsibility for any losses incurred from any action or inaction derived from the advice in this report.