Dorsey Wright & Associates. Point and Figure Message Board

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Non-Tech : Dorsey Wright & Associates. Point and Figure

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To: Ms. X who wrote (2784)	12/10/1999 12:11:00 PM
From: Ms. X	Read Replies (1) of 9427

DWA Reference Manual continued... Trendlines Using trendlines helps us to make buy/sell decisions. When a trendline is broken, it signals a change in the posture of the stock. The two major trendlines: the bullish support line, and the bearish resistance line, can be used to identify areas of support and resistance in point and figure charts. Bullish Support Line: When the stock has formed an apparent bottom, a bullish support line can be drawn. It should start in the box directly below the lowest O in the lowest column and move upward at a 45 degree angle. Bearish Resistance Line: This is the reciprocal of the bullish support line. A bearish resistance line is to be drawn above the highest X in the highest column downward at a 45 degree angle. Relative Strength Relative strength readings are incredibly important in stock selection in all kinds of markets. The relative strength calculation is simply done by dividing the price of the stock by the price of the Dow or any index you choose and then multiplying by 1000. This number can then be plotted on a point and figure chart. RS chart buy signals are given when a column of X's exceeds a previous column of X's. Sell signals are given when a column of O's exceeds a previous column of O's. Relative strength signals generally last about two years and tell the overall trend of a stock. Positive relative strength suggests the stock will outperform the market while negative relative strength suggests the stock will underperform the market. It's also important to watch for reversals for short term guidance. Say for instance XYZ was at $80 and the Dow was at 2,500. If we divided $80 by 2500 and moved the decimal we would get 32. This number 32 can be plotted just as if it was an $32 stock. Let's say the following week the stock falls to $72 and the Dow dropped to 2000. We now divide $72 by 2000 and get 36. In this case the stock dropped, the Dow dropped but the relative strength chart went up. This tells us that the stock is doing better than the Dow and it is possible that the only reason it is down is that the overall market is down. This stock could be one of the first to snap back when the overall market is ready. Remember according to a University of Chicago Study 75-80% of the risk in a stock is market risk, 20-25% is stock specific risk. Momentum/Trading Bands At Dorsey, Wright & Associates we use measures of momentum and overbought/oversold readings to aid in our interpretation of a stock. The measures are computed by our database, and can be accessed by clients. Momentum: Following weekly momentum is very helpful when timing trades. A positive weekly momentum suggests higher prices and negative momentum suggests lower prices. Weekly momentum is a shorter term timing tool as changes to positive or negative weekly momentum last seven weeks on average. We can calculate the number at which momentum will change to positive or negative. If the price of a stock is below the price that stock needs to hit in order to change its momentum, then the change number is where the momentum will turn positive. If the price of the stock is above the change number then this is where the weekly momentum will turn negative. See next page for a sample momentum table. XYZ Corp. Weekly Momentum Table Date Bullish Bearish Last Cross =================================================== 04/21/97 0.00000 -0.05268 19.500 22.987 04/14/97 0.00000 -0.03488 20.750 23.029 04/07/97 0.00000 -0.02531 20.250 21.867 03/31/97 0.00000 -0.00998 21.375 22.019 03/24/97 0.00000 -0.01340 21.875 22.755 03/17/97 0.00000 -0.04961 21.875 25.336 03/10/97 0.00000 -0.06116 21.875 26.131 03/03/97 0.00000 -0.08037 21.000 26.567 02/24/97 0.00000 -0.07396 21.000 25.983 02/17/97 0.00000 -0.01555 20.625 21.567--- Weekly momentum 02/10/97 0.06603 0.00000 22.500 18.777 turns negative here 02/03/97 0.09317 0.00000 22.375 17.270 as the numbers are 01/27/97 0.12540 0.00000 22.500 15.847 under the bearish 01/20/97 0.12228 0.00000 23.000 16.508 column 01/13/97 0.10112 0.00000 20.687 15.564 01/06/97 0.09289 0.00000 19.000 14.462 12/30/96 0.11479 0.00000 18.625 13.247 12/23/96 0.21601 0.00000 17.750 9.013 12/16/96 0.25133 0.00000 18.375 8.346 12/09/96 0.23051 0.00000 17.625 8.265 12/02/96 0.26702 0.00000 17.250 6.915 11/25/96 0.21550 0.00000 18.000 9.102 11/18/96 0.07435 0.00000 14.750 11.308 11/11/96 0.01208 0.00000 14.375 13.746 --- As long as the 11/04/96 0.00000 -0.04797 15.500 18.400 numbers are under 10/28/96 0.00000 -0.17586 13.750 27.880 the bullish column 10/21/96 0.00000 -0.20112 14.000 31.266 we consider the 10/14/96 0.00000 -0.18489 15.500 30.971 weekly momentum 10/07/96 0.00000 -0.18102 16.750 32.507 positive. We watch 09/30/96 0.00000 -0.16417 16.500 31.472 for the first week 09/23/96 0.00000 -0.06613 26.000 32.195 the data flips from 09/16/96 0.00000 -0.04874 29.375 34.006 one column to the 09/09/96 0.00000 -0.07187 27.500 34.358 other to signal a 09/02/96 0.00000 -0.04422 28.250 32.329 change in momentum 08/26/96 0.00000 -0.00517 29.750 30.211 Trading Bands: This is the basic bell curve, giving a picture of whether a stock is overbought or oversold based on a 10 week moving average. 100% overbought is three standard deviations above normal. 100% oversold is three standard deviations below normal. If the stock is 100% overbought, it suggests the stock will correct to normal on the curve. If the stock is 100% oversold, it suggests the stock will bounce to normal. The disadvantage to trading bands is the tails can go out to infinity. * * * * * * \| * * \| * * \| * * \| * * \| * * \| * 100% Oversold Normal 100% Overbought * * * * \| * * * * ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

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