Knowing when to ignore signals

It is sometimes advisable to ignore the minor double-top buy and bottom sell signals, especially as the pattern becomes larger and more complex, as
shown in Figure 3-15 .

• The first signal, marked A, is a double-bottom sell in column 6, where the 0 goes below the previous column of Os. The analyst may, however, look
left and see that there is an 0 in column 2, one price box lower, and decide to ignore the minor double bottom signal. This decision would be made by
considering how the pattern was entered. If the pattern was entered from below with a column of Xs, as is the case with this pattern, it is unlikely that a
simple double-bottom sell signal will reverse the trend. If, however, it was entered from above, with a column of Os before column 1 , then the double-
bottom sell at A is a continuation signal and should be taken.
• The next signal is a triple-bottom sell, marked B, where the 0 in column 10 goes below the previous two columns. Once again, looking left shows the 0
in column 2 as support and, although this is a triple-bottom sell, it may also be ignored.
• Progressing along the pattern, the third signal is a triple-top buy, marked C, in column 11 . Looking left again shows Xs at this level in columns 3 and 5
as well as another in column 1 . Although it is a triple-top buy, it is weakened by the presence of Xs to the left, in columns 1, 3 and 5, and may therefore
also be ignored.
• A minor double-top, marked D, is shown in column 15 and ignored by looking left again. As more of these signals occur within the pattern, so more
support and resistance is built up, making it easier to spot which signals should be ignored.
• Finally, the signal marked E is a multiple top buy signal in column 17, breaking the Xs in columns 1, 11 and 15 . The buy is taken because looking left
shows the demand has exceeded the supply for the first time in the overall pattern.

This example shows that although Point and Figure signals are unambiguous, a certain amount of subjectivity must be applied. That Subjectivity is only
possible if you are able to go inside the chart, so to speak, and understand the psychological make-up of the bulls and bears within the pattern. Remember,
in all cases, the patterns work in the reverse as well.
Exactly the same scenario takes place in Figure 3-16, but in reverse. The signals are marked as before.

Importance of reassertion of control

What all these patterns are showing us is the reassertion of control by one group over another. In fact, the more times the bears can overcome the bulls,
preventing an X column breakout, the more important the eventual X column breakout becomes. Similarly the more the bulls can overcome the bears,
preventing an 0 column breakout, the stronger the sell signal becomes. It is the act of reaching a support or resistance level only to be forced back that
makes the subsequent breakout more significant, and hence the trend, stronger. As in life, being able to reassert yourself after a setback makes you that
much stronger.

The strength of the pattern

Knowing whether the pattern is likely to be a continuation or reversal pattern has important implications for Point and Figure analysis. Whilst the pattern
is being formed, there are clues to the strength of the pattern and the subsequent breakout. Strength is influenced by two things:
• Sloping sides
• Breakout and pullback

Upside and downside triangles - sloping bottom or sloping top

An up-sloping bottom (Figure 3-17) makes any compound pattern bullish to the upside because the slope means that the demand is coming in at higher
levels on each reaction. A down-sloping top (Figure 3 - 18) makes the pattern bearish because supply is coming in at lower and lower levels. These
triangles are known as upside and downside triangles. They are much harder to spot in bar and line charts.
It is important to note that the signal is not generated until the breakout from the pattern occurs, but the sloping bottom or top gives you a clue to the
direction of the breakout. These are very similar to triple-top and bottom patterns seen earlier and like those patterns, they can be continuation, as they are
in Figure 3-17 and Figure 3-18 above, or reversal, as they are in Figure 3-19 below and Figure 3-20 opposite. The only difference, as explained earlier, is
that a reversal pattern has a different column type entering the pattern from that leaving the pattern.

Remember these are much more likely to be seen in their neat form in 3 -box charts. The same pattern in a I -box chart will have more price action and
may not be quite as easy to spot. The upside triangle in Figure 3-17 may translate into Figure 3-21 in a I-box reversal chart. This pattern falls into the
category of a semi-catapult discussed earlier .
Like all patterns, upside and downside triangles can fail as the chart of the S&P 500 Index in Chart 3 -2 shows. The perfect upside triangle within a strong
trend failed to break up and instead broke below the sloping bottom triggering a sell signal. This reinforces the view that
while the pattern provides you with the likelihood of the break, the signal only comes when a double-top or double-bottom signal is issued. The pattern in
the chart is identical to that in Figure 3 - 1 7 until the part where it does not break up.
Symmetrical triang les - sloping top and sloping bottom
When you see a sloping top and bottom in a pattern, this indicates uncertainty on the part of the participants and therefore the direction of the breakout
cannot be predicted with any degree of certainty. There is some evidence that the breakout is more likely to be in the
direction of the underlying trend, and this tends to be the case with smaller patterns. The bigger the pattern the more likely it is to be a reversal pattern.

The important thing to note with these symmetrical patterns is that the signal is not given by the break of the trend line. As in all Point and Figure
Analysis, the signal is generated when a breach of a previous column occurs. The buy shown in Figure 3 -22, and sell shown in
Figure 3-23, occur after a double-top and double-bottom breakout, respectively. You may wonder why looking left and seeing resistance does not cause
you to ignore the signal. It really depends what the greater pattern looks like. If it is simply a triangle, then the signal
should not be ignored, especially if the signal is with the main trend.

The patterns shown thus far are idealised, so when you look at a real chart they may not be quite as clear. Chart 3-3 of Whitbread pIc shows two patterns
with sloping sides. Pattern A is a typical upside triangle with up-sloping bottom and flat top, similar to the ones in Figure 3–17 and Figure 3-19.

Pattern B shows a typical symmetrical triangle with sloping top and bottom, similar to Figure 3-22. It is not a perfect pattern but it is still a symmetrical
triangle with a break to the upside. Note that the signal only comes with the break of the triple-top.

Continue from page 135, with Chart 3-3 of Whitbread pIc……..