Once you know whether a stock price is likely to go up or down, you can use PnF charts to generate buy and sell signals.
PnF Charts
In Market Awareness blog I discussed how monthly price and volume charts can be used to determine the direction of the momentum of a stock. Using them you can predict with reasonable accuracy whether a stock is likely to increase or decrease in price. You can then use Point and Figure (PnF) charts to determine exactly at what price you should buy or sell the stock.
PnF charts are simple in that they are only dependent on the price of a stock. Price increases are marked by X’s and price drops marked by O’s. You can learn more about PnF charts at https://www.investopedia.com/articles/technical/03/081303.asp.
Support and Resistance
Stock prices are subject to demand and supply. When demand exceeds supply the prices go up. When supply exceeds demand, prices go down.
There are specific price points where the supply is likely to exceed demand. At these prices a stock whose price has been increasing, encounters resistance and stops going up. This price point is called Resistance.
Similarly, there are specific price points where the demand is likely to exceed supply. At these prices a stock whose price has been decreasing, finds support and stops dropping. This price point is called Support.
The reason why supply or demand changes at specific price points is because of what is called ‘price memory’. Stocks are bought and sold by people. People have memory and remember what price they bought or sold a stock.
Imagine someone bought a stock at $10. Subsequently the price increased to $11 and then turned around and dropped all the way down to $5. If the stock goes back up to $11 the person who bought the stock at $10 is likely to sell fearing a repeat of the previous experience. There will be many such people who would have experienced the pain of seeing the price drop at $11. They will also sell the stock if its price goes back up to $11 after dropping to $5. This increases the supply of the stock and causes the price to stop increasing. This creates a price resistance. Exactly the opposite happens to create a price support.
Buy and Sell Signals
PnF charts are especially useful to generate buy and sell signals because they clearly show the stock’s resistance and support prices. A buy signal is generated when the stock price exceeds the resistance level. A sell signal is generated when the stock price falls below the support level.
Double and Triple Tops and Bottoms
The more times a stock’s price increases and fails to go above the resistance, the more powerful the upward momentum when the stock finally goes above the resistance. This is clearly seen on a PnF chart where you can see two or three X’s at which the stock stops moving up. The more the X’s the stronger the subsequent upward momentum.
A stock’s downward momentum is accelerated when it falls below a double or triple bottom level indicated by two or three O’s. The more the O’s the stronger the subsequent downward momentum.
Free PnF Charts
You can use free PnF charts at Stockcharts to generate buy and sell signals https://stockcharts.com/freecharts/ Enter the stock symbol in the input box of the Point and Figure section to generate the chart.