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Point & Figure Charting

DOUBLE BOTTOM AND SIMPLE SELL SIGNAL

A simple SELL signal happens after a double bottom has been made. So you will ask me what is a double bottom.

Illustration chart:

http://chartink.com/pandf.php?name=nifty

Once again I have taken the chart of Nifty for the purpose of understanding double bottom. Look at the chart to the extreme right. At 5600 Nifty made a double bottom. A double bottom is formed, when there are two adjacent O’s without anything in between. From (9) i.e month of September, the nifty rose from 5300 to 5800 and then fell once again to 5600 to make the first part of the double bottom. Then it rose again to touch 5750 and thereafter once again fell to touch 5600, where it completed the double bottom. When an O exceeds a double bottom by one box it gives a sell signal. In our case the Nifty gave a sell signal at 5550. It also made a double bottom at 5600.

However, this sell signal did not last long and the markets reversed once again and made a new high at 6100. This correction could have been used by market participants to enter the market as the market was consistently making higher tops and higher bottoms which is a bullish sign.

Hope this is clear to all of you. For your assignment and practice at home try to read more charts showing double bottom and sell signals.

Please do give your feed back so that i can help you in clearing your doubts or improve my presentation.

Hi Anuprem,

You have asked a good question. One should remember that when a double top is made and the market moves higher after giving a buy signal, then the previous double top becomes a support when the market reverses.

Similarly when a double bottom is made and the market sells off further, then when the market reverses once again the double bottom created earlier will become the resistance for it.

The Nifty had created a double top at 5800 and 5750 and hence both these levels will act as support to the market when it reverses. Yesterday it happened once again. The market broke the support of 5800 but took support of 5750. Let us see how long this support holds or else one can see levels of 5550 where a double bottom will be created or 5400 where it had earlier made a double top.

Hope I am clear in my explanation.

Thanks Tony. One more basic question in case the 1st support is broken can we determine the 2nd support using P&F chart. Is it a recursive process where we set the previous double top point lower then the current double top point as 2nd support and so on. Or we need some other indicator?

Hi Anuprem,

Let us read the Nifty chart once again.

http://chartink.com/pandf.php?name=nifty

After making a high of 6100, nifty reversed and its first support was at 5900. Look at extreme left on the chart, where in the month of April 2011, the Nifty had made triple top at 5900. Thereafter, there was support at 5800,(see extreme right) where the Nifty had made a double top during October, 2012. Next support is at 5750 just below the existing one where once again Nifty had made a double top on its journey upwards. Till today this support held.

Now if this support breaks, then the Nifty will make a double bottom on its journey downwards at 5550 and then at 5400 where a double top was made when the Nifty was rising.

Hope this is clear to you now. See how the double bottoms act as support on downward journey and double tops act as resistance on upward journeys and vice versa.

This makes reading of charts very easy and simple.

Hi Tony,

After 5750 isn’t the support at 5600?

Towards the left of the chart there are double and triple tops at 5600.

Also in your last statement you said during fall double bottoms act as support, while the example you point double tops as support. This confused me.

-Akbar

http://chartink.com/pandf.php?name=nifty

Hi Akbar,

i am really happy that these queries are being raised. You are absolutely right there is a double top and a triple top at 5600 at the extreme left. However, they will not apply here because there are columns of X’s and O’s covering them. The area has to be open and not closed. The only double top which will act as the support is the one made between two X’s, one in the month of February, 2012 and the other X in the month of September, 2012. Both these X’s were at 5600 and hence an extended double top. The other double bottom is made below the alphabet B in 2012.

Also note that another double bottom can be formed at 5550 when the Nifty falls to this level. There is support at 5450 because there is an extended triple top and once again a double top at 5400. There are no columns of X’s and O’s between the triple top and the column which we are presently in the year 2013.The others at the extreme left will not hold good as these are covered by columns of X’s and O’s.They should be open to the columns where the Nifty is currently.

I have tried my best to explain to you. Hope you understand it.

Hi Akbar,

There is a correction. The only support now the Nifty has is at 5550. The extended double top at 5600 and the double bottom at 5600 on extreme right as mentioned in my narration above will not hold good as there is an X in the second last column coming in the way at 5600.

Hi Manish,

Can you tell me how you managed to get the chart will all the annotations? It will help me in my teaching at this thread.

future.I

Hi Akbar,

I managed to get the chart done in Paint brush so now i can explain to you.

See the markings at extreme left in blue (arrow). These cannot act as support (5600) as there are columns of X’s and O’s in the month of July and August 2011. See the arrow marked in red at extreme right at 5450. This is an extended triple top which will act as the support if Nifty breaks 5550.


SELL SIGNAL:

I hope all of you have understood a buy signal and a double top too.I will take the topic of SIMPLE SELL and DOUBLE BOTTOM.

Col 1 Col 2 Col 3 Col 4 Col 5
800
O X O
700 O X O
600 O X O
500 O O
400 O

From the above chart we can now read the following:

The stock met resistance at 500 and the number of BUYERS exceeded the SELLERS. The stock reversed once again from column O to column X. It rose thereafter once again to 800 where once again it met resistance as the number of sellers exceeded the number of buyers. The stock reversed and changed to column O. The price fell to 500 where it made a DOUBLE BOTTOM. With more selling the price now touched 400. It is at this point the stock gave a sell signal.

Remember that BUY AND SELL signals are very important. For your assignment practice DOUBLE TOPS, DOUBLE BOTTOMS, BUY SIGNALS, SELL SIGNALS again and again. This is the most basic one has to master. So master it well. You should know these signals like the back of your palm.

Thanks Tony for all the explanations and sorry for the trouble.

-Akbar

Hi Akbar,

It is only by asking that one learns. The more the number of queries, the better will be the learning experience. So go ahead and shoot as many queries as possible.

All are welcome to a pragmatic and sensible discussion. This will enrich are learning.

SELL SIGNAL:

There is a lot of confusion in the minds of analyst who are new to Point and Figure charting in understanding a sell signal. Usually when the stock price moves from O column to X column, readers get confused if the sell signal is cancelled and whether the stock is once again a buy.

Col 1 Col 2 Col 3 Col 4 Col 5
800
O X O X
700 O X O X
600 O X O X
500 O O X
400 O

From the above chart we can read the following:

The stock gave a sell signal at 400 and then reversed in the X column. This only indicates that now there are more buyers than sellers. The price has reached 800 once again. However, the sell signal has not yet been negated. Only when the stock crosses 800 and touches 900 that one can say the stock has given a buy signal.

Please read this carefully as there is a likely hood of misunderstanding signals of buy and sell.

Check charts of stocks and try to understand this pattern over and over again. This will help you in understanding Bullish Percent which will be explained much later to you.

Bullish Signs:

We all hear a lot of technical analyst commenting that the stock has been making HIGHER TOPS AND HIGHER BOTTOMS. What does this really mean?

Attached is a chart of Asian Paints which shows arrows in blue colour. The arrows in blue colour are consistently rising. These arrows show that the stock has been making higher tops over a long period of time.

Similarly, the red arrows show that the stock has been making higher bottoms over a period of time.

One will notice that with each successive higher top and higher bottom the price of Asian Paints is rising. Higher tops and higher bottoms are a good sign of a stock. This reflects bullishness in the stock. Such stocks have to be bought at every correction to make handsome gains.

The stock has risen from 1750 to 4500 which shows strong bullishness. In the recent market correction the stock has not fallen much. The trend of the stock has an upward bias which is reflected in the price of the stock


BEARISH SIGN:

A stock shows bearish signs when it starts making lower tops and lower bottoms. This is exactly the opposite of higher tops and higher bottoms. A word of caution! Do not go bottom fishing. There must be a reason why a stock is making lower bottoms. Check the fundamentals of the stock before making a decision to buy a bearish stock. If you are absolutely convinced about the fundamentals of a stock, then go out and buy it.

For your reference I have attached a chart of Orchid Chemicals which is showing extreme bearish sign. As I write today the stock has fallen to Rs.54.75. See the arrows marked in Pink which show the lower bottoms the stock has been making over a period of time. There is no hope for such a stock in the short run, especially when the markets themselves are correcting.


I would like to have your feed back on the postings I have made till date. This will go a long way in improving the teaching which I have undertaken.

Will be away for a week from tomorrow and hence will be able to write on new ideas there after.

Sorry for the break.

Hello friends,

I am back once again, and will continue from where i left shortly.

TRIPLE TOP

As the name suggests, this is a chart pattern where the stock has reached the same price level thrice and was unable to surpass it. This means that whenever a stock reaches a particular price level it is unable to exceed that particular price as more sellers than buyers come and sell at this price which eventually leads to price fall. The only way we will know that selling pressure has exhausted is when the price breaks out of this level and exceeds this particular price resistance.

To make it easy for you to understand I have attached the chart of Ajanta Pharma where the stock first made a triple top at 170 then at 440 and now recently at 620.

Further note that the stock has been making Higher Tops and Higher Bottoms which is a bullish sign. This is evident from the price of Ajanta Pharma which has moved from 145 in August 2011 to 667 in March 2013. This is one of my favourite stocks which has given me huge returns

Triple-Top.docx (42.4 KB)

TREND LINES

There are two types of Trend Lines:

1). BULLISH SUPPORT LINE (BSL)

2). BEARISH RESISTANCE LINE (BRL)

It is amazing to note how stocks behave above the BSL and below the BRL. These lines act like the Great China Wall. Stocks touch these lines and bounce back again.

BULLISH SUPPORT LINE:

This trend line is also known as the uptrend line. Usually stocks trading above this line are said to be in the uptrend. It is best to buy stocks that are trading above their bullish support line. A stock will often pull back to the bullish support line and bounce upwards. Therefore they are called as brick walls.

Trend lines play an important role in making buy or hold decisions. When an investor wants to buy or hold a stock, he should always buy stocks which are in the overall uptrend and moving higher. When the bullish support line is broken or penetrated it signals a change in the trend of the stock from positive to negative, and it is time to recheck the fundamentals of the stock and evaluate if the stock should be held or sold.

Ajanta Pharma is one such stock displaying amazing bullishness and trading above the Bullish Support Line marked in blue in the chart below:

One will note that the stock has never penetrated or broken the Bullish Support Line since January 2012. This shows that the stock is in a major uptrend.

BEARISH RESISTANCE LINE:

This trendline is the opposite of Bullish Support Line. This line is also called the downward trendline. It is best to stay away from stocks trading below their bearish resistance line. ( See line in pink) sloping downwards.

When a stock is trading below its bearish resistance line, it is considered to be in a down trend. Very often stock prices rise up to the bearish resistance line and are repelled lower where it is met by fresh selling. This is how the stock price keeps trending lower. However, when the bearish resistance line is broken or penetrated, it is a signal that the trend has changed and the stock will enter positive territory. This is the time to evaluate whether the stock should be bought.

Above is the chart of Opto Circuits which is trading below its bearish resistance line (pink line). In the month of October, 2012 marked (A), the stock reached 140 and made a double top. Thereafter it broke the resistance line at 136 and thereafter see what happened to the stock. It touched a low of 44.

It is best to avoid such stocks and desist from bottom fishing as no one really knows how low the next low will be.