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Strategies & Market Trends : Point and Figure Charting -- Ignore unavailable to you. Want to Upgrade?

To: Ms. X who wrote (806)	2/18/1998 1:03:00 PM
From: Jerry Olson	Respond to of 34816

Hi Jan Just getting back in harness again.. got some goodies for your expertise<g>... I'm currently enamoured with Blue Sky "Breakouts"<g>... Do your stuff on these babies...AVEI( JUST BROKE OUT)-MRK-(I THINK THEY WILL SPLIT SHORTLY)- LU-( JUST ANNOUNCED 2-1 AND SHOULD GO MUCH HIGHER) AND AOL...ITS RETREATED SOME FROM THE TOP, BUT I LIKE THIS TO EXPLODE TO THE UPSIDE ALSO ANNOUNCED A SPLIT... There are more, but these are the most powerful for this type of market... Thanks Jan, My Regards, Jerry

To: Ms. X who wrote (806)	2/18/1998 3:12:00 PM
From: Ms. X	Respond to of 34816

Tom Dorsey Q&A Part 1. Q) I understand the rule for price objective given on page 24 of the book. How was the rule developed? A) Believe it or not the rule comes from the science of Ballistics and was developed in the late 1800's. ----- Q) The definition of a "Bullish Signal Reversal" is a pattern of seven columns of rising bottoms and tops- then when the last top is made in the seventh column, the stock reverses to give a Double Bottom sell signal. Page 59. Does SUNW qualify? A) Not really. I like to see it a little more symmetrical and should look like a flag blowing in the wind off a flag pole. ----- Q) Please have Tom discuss his opinion on using the ZigZag indicator plotted on top of price bars in addition to (or instead of) P&F charting. A) Sorry I don't know anything about ZigZag indicators. ----- Q Is Point and Figure Charting any more or less reliable than candlestick charting ? A) I have no idea as I have never evaluated Candlestick charting. I have used Point & Figures so successfully for over 15 years, I have not ventured out to evaluate other methods. I learn something new with P&F every day. You must find the method that you are the most comfortable with, whether it's Gann Angles or Waves. Then do everything you can to become an expert in it. All methods work in the right hands. The P&F works in most hands. Because it takes time to learn, most investors are not willing to invest in that time so it is truly a very unique group that understands it. ----- Q) What is the reliability of these large vertical counts. (ex. a column of X's extending past 10 boxes or more). A) Very high, although my statement comes from years of use. They are so accurate they are uncanny. There is no study that has been done however. Possibly you would like to do one. ----- Q) An RS chart may be in column of O's down to 1 1/2. (For example a $12 stock with DJIA at about 8000) It would take a move up to 2 1/4 to begin a new column of X's. This three box move means the stock would have to go up 50% better than the market. This means the big move would have already taken place before an RS signal was given. If I find a $12 stock that meets the rest of my screens, should I use different factor to get a more responsive RS chart? A) What if the stock doesn't move but the market goes down? The RS chart will also move up. Also, you have a combination of stock rising and market declining which also affects the RS chart. In your example you are right, it would take a big move in the stock to reverse the chart. ----- Q) A question for Tom Dorsey on his book. His Chapter 5 on "Using Relative Strength calculations" pp 79-89 does not explain how one calculates RS. I've seen formulas for calculating RS for regular charts. Can he provide us a write up on this with formulas? A) Simply divide the price of the stock by the Dow Jones or anything else you want to divide by. Take that number and plot it on a P&F chart and evaluate the same as equities.

To: Ms. X who wrote (806)	2/18/1998 3:13:00 PM
From: Ms. X	Read Replies (1) \| Respond to of 34816

Tom Dorsey Q&A Part 2 Q) RS question - The definition Ben gave is calculated relative to DOW average. In regular charting, RS is determines the strength of a stock using some weighted average. At the minimum, I was hoping RS to determine the strength of a stock relative to its peers in the sector. If DOW is used in RS calculations, the NYSE bull percent is used for the general market direction? Sounds too simple-minded! If it has worked for others, then it is OK with me. A) It is simple and it does work. Keep it simple. ---- Q) RE: 100 minimum stocks in a sector From what I've read of Tom's writings, I have not seen a specifically defined reason for the number 100. Statistics theory, the central limit theorem specifically, says that a population only has to be greater than ~30 members to allow that population to be treated as having a normal distribution and all that that implies. From observing some of the key percentage points that Tom uses, it appears that these coincide with some of the key percentage points of the normal distribution A) Yes you are right, I took many hours of stat in University. A.W. Cohen who developed this method suggests a minimum of 100. You may change it as you wish, we stick with the minimum 100 where possible. In some cases we have to go for less but not generally. We also encompass all the Investors Business Daily groups in our sectors. ------ Q) Tom, Can you discuss the basis and importance of Sector rotation? I hear a lot about it but I must confess I have no idea what that means. Thanks. A) A study done by the University of Chicago suggests the vast majority of risk in a stock is found in the market itself and the sector. We try to buy stocks in sectors that are down. When The Semiconductor stocks were hit recently and the sector went to what we call a low level, we begin to look for stocks in that sector that are fundamentally sound and then we wait for the technicals to come together. ---- Q) Are there any rules concerning buying stocks that are extended a great deal from there base? example - a stock breaks out from a triple top at 30 and moves all the way up to 60. If this stock pulls back to say 56 and then goes back up breaking the double top, would this double top be considered a buy signal or are there any rules about staying away from stocks that have had recent run ups? A) It's hard to say. There are always many right answers in the stock market. We endeavor to highlight a few. In the case you mentioned. You could buy on the buy signal given on the reversal back up because it sets up a good close stop point . This is also a case for a call option. Possibly a slightly in the money call will be the best course of action. You would consider the premium paid for the call as your stop point. Hold it until expiration. This gives you staying power to withstand violent moves if this is what happens. I have some questions for you and Tom. Q) What is your (Jan, alias P&F Madness) relationship with Tom or his company. Do you get some kind of commission from him. A) Jan is our first outsource, Mentor/Intern we have accepted. She is on a fast track program of learning this method. She has come to the home office to learn directly from us here and much of her education has come over the net, phone, and carrier pigeon. Eventually we will attempt to place her in the business with a money management outfit/hedge /research firm etc. She is not paid and has no ax to grind in presenting this firm to anyone else in any way. Her relationship to the company is educational. ---- Q) Could he explain why you use a 1 point box from 20 to 100. Why not use a scaled chart where each box is a fixed % greater than the box below it. Is it just easier for those who plot by hand? A) We used a semi log chart years ago and found it gave us no advantage. This method has worked for over 100 years and we'll just stick to the basics. ---- Q) Do you look differently at a three box reversal on a $25 stock than you do on a $85 stock. A) No, again, we used semi log charts in the past to no advantage. I see where you are coming from but no we don't look on it any differently. The box reversal only increases, if you choose to do it, when the volatility of a stock is too high for the lower box reversal. The volatility of an $85 stock might be much lower than the volatility of a particular $25 stock so the three box reversal could be too low for the $25 stock not the $85.

To: Ms. X who wrote (806)	2/18/1998 3:18:00 PM
From: Ms. X	Read Replies (4) \| Respond to of 34816

Tom Dorsey Q&A Part 3 Q) This is the first rough draft of my new methodology (probably widely used and I am not aware of it). I planned to see what would happen if I bought on major trend reversals up and sold on major trend reversals down. The only adjustment I made to the model was to sell on anything that showed a 20% increase over my entry point. The idea of using a percentage gain to trigger a sell came when I realized that in a lot of cases the reversal ate a lot of the potential profit. The wisdom of this approach is one of the things I wondered if you could comment on. It is a two edged sword because it also triggers a sell far short of the top in big runs. Have you ever heard of such an approach? I know from past experience that my original ideas sometimes appear in publications quite a few years before I think of them. It is possible I haven't read far enough into the book yet. The number 20% came out of my head and probably could be adjusted but I haven't messed with it too much yet. Does any of this make any sense? Thanks for your help and any input you have on these ideas. A) You are on the right track in thinking that the reversal or sell signals, when it develops, often results in mucho lost profits. We will stop any position when it rises 20 boxes then reverses 3 boxes and we also sell 1-3 of our position if it rises 30% and another 1-3 if it rises 50%. Same concept. There are many right answers in the market. ----- Q) Do you make any adjustments for Options Expiration? A) The only thing we do on option expiration is, place an order to 2 points higher than current price in a stock you want to sell and visa versa in a buy. Both might get off during this week. ------ Q) From my limited knowledge of what traders do, if NE moved above 30.5 before next Friday it would be a blip, so buying above 31 would ensure that you paid the highest price of the week. On the other hand, it is likely that a stop at 25 would get taken out on a momentary slip to 24.5 ensuring that you sold at the low of the week. The theory is basically that if you bought 25 calls last week you would take the free short of common above 30.... well, you can work through all the scenarios, but the idea is that profits are locked in whether it closes 25ish or 30ish on Friday. (This is not a manipulation theory, just what I was taught about why the common is usually pinned to the strike at expiration. The general market/sector direction determines it is 25 or 30. It would take very good or bad news for it to not close near one of those strikes.) So what I am trying to ask (you or Tom) is if it might be better to lower both the stop and buy price about 1/2 for the week. Is that against the rules? I'm more concerned about placing a stop right at the strike price. Since the stock is right in the middle now, there is (in theory) a 50/50 chance of that 25 stop getting hit, but not much chance of the stock closing the week below 25 (unless something awful happens).. A) You have some very good ideas here and I will go with them. You are right on the options as forward and reverse conversions are in play during this week. Good idea. ----- Q) NMSS is a stock that has done very well for us. We are currently up 350% or so. We have a core holding of 1400 shares. We have traded this stock fairly successfully from time to time maintaining a core holding. I feel as though the market is due for a correction, Asian flu is one possible cause of numerous possibilities. So , I want to start a sell program with NMSS. Could you suggest a sell program? Do you think we should continue to hold any long or sell them all considering our huge gains? A) I would begin to sell calls against your large positions in NMSS. This takes the emotion out of selling. I would begin with some 5 points in the money and some at the money and possibly some out of the money. The in the moneys I would look at as cash but considering the chart pattern you just might need some big premium as protection. Using calls like this take the emotion out of selling and will allow you to pear back this position to something more manageable. You have too much exposure here. ---- Q) How do you view the market? A) On the market I typically don't predict. Right now we have the ball but I do know that the NYSE Bullish Percent has had a very high propensity to reverse between Jan-Feb-Mar. When it does, if it does we will take action. Drive as straight a line as possible. Keep it simple. ---- Q) Although it is very difficult if not impossible to time the market I feel having some cash on the sidelines could be a smart thing right about now. What would your take on this be? A) We will put up some cash when the Bullish Percent indexes suggest so. Right now things are fine. ---- Q) We got into SUNW at 31 in Oct when the market lost those 500 points. It has gotten as high as 49 and is currently at 44. If I wasn't thinking long perhaps I could have taken advantage of this pullback. Instead my strategy is "I'll buy more if it goes below 42." I feel there is something fundamentally wrong with this thinking. Do you concur? A) With the long term trend of SUNW decidedly up, OK to buy at $42. ---- Q) How do you employ a stop effectively? A) Stops can be trailed up in a stock you have profits in. Typically we will use potential new sell signals that develop as potential stops if they are given. Trend lines are also used as stop points. Stops are one of the hardest thing to use. It always seems when you stop out, the stock reverses and rises. This does happen in some cases. Fundamentals are important to consider. If they remain as good as you understood them to be initially you might want to give the stock more room.