Point and Figure Chart Pattern

Let's take a look at the patterns. Since column 2, showing signals S-1 through S-8, is just a mirror image of column 1, we'll concentrate on the buy side. The first 2 signals, B-1 and B-2, are simple formations. All that is required for the simple bullish buy signal is 3 columns, with the second column of x's moving 1 box above the previous column of x's. B-2 is similar to B-1 with one minor difference-there are now 4 columns, with the bottom of the second column of o's higher than the first. B-1 shows a simple breakout through resistance. B-2 shows the same bullish breakout but with the added bullish feature of rising bottoms. B­2 is a slightly stronger pattern than B-1 for that reason.

The third pattern (B-3), breakout of a triple top, begins the complex formations. Notice that the simple bullish buy signal is a part of each complex formation. Also, as we move down the page, these formations become increasingly stronger. The triple top breakout is stronger because there are 5 columns involved and 2 columns of x's have been penetrated. Remember that the wider the base, the greater the upside potential. The next pattern (B-4), ascending triple top, is stronger than B-3 because the tops and bottoms are both ascending. The spread triple top (B-S) is even stronger because there are 7 columns involved, and 3 columns of x's are exceeded.

The upside breakout above a bullish triangle (B-6) combines two signals. First, a simple buy signal must be present. Then the upper trend line must be cleared. (We'll cover the drawing of trend lines on these charts in the next section). Signal B-7, upside breakout above a bullish resistance line, is self-explanatory. Again, two things must be present. A buy signal must have already been given; and the upper channel line must be completely cleared. The final pattern, the upside breakout above a bearish resistance line (B-8), also requires two elements. A simple buy signal must be combined with a clearing of the down trend line. Of course, everything we've said regarding patterns B-1 through B-8 applies equally to patterns S-1 through S-8 except that, in the latter case, prices are headed down instead of up.

There is a difference between how these patterns are applied to commodity markets as opposed to common stocks. In general, all 16 signals can be used in stock market trading. However, because of the rapid movement so characteristic of the futures markets, the complex patterns are not as common in the commodity markets. Much greater emphasis is therefore placed on the simple signals. Many futures traders utilize the simple signals alone. If the trader chooses to wait for the more complex and stronger patterns, many profitable trading opportunities will be missed.