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[Camisa Roxa]

I mentioned Point & Figure (P&F) charts last Thursday in relation to the calculation
of the Bullish Percent reading on the major indexes. I'm a fan of Point & Figure
charting in volatile markets, because this method tends to smooth out much daily
noise and focus on the broader trend in a security's price.

P&F charts are calculated by plotting X's for rallies and O's for declines. One must
define the number of boxes required to get a reversal (usually 3, though for more
volatile stocks you might want to expand to 5 or more) and the number of points to
plot in each box (usually 1 full point).

Let's look at an example of a recent short position we added in Quest Diagnostics
(DGX). We have a 1 X 3 P&F chart (1 point per box with a 3 box reversal). Notice on
the far right side of the chart, our O's plotted in red signify down movement, while
X's in green signal up movement.

DGX POINT AND FIGURE CHART

The typical interpretation of buy signals occurs when an X moves above a previous X,
while the latest sell signal occurred when the O took out the prior low O at 56,
giving the sell at 55. Note that the stock must trade to 55.00 or lower to plot a
new O at 55. If DGX was trading at 55.01 at its low, that would not be good enough
to create a new O at 55.

I have also added a simple 50-bar moving average (in blue) in this chart, to help
define the overall trend on the P&F chart. With this filter in mind, this further
smoothes noise by suggesting you should only take new buy signals above the 50-period
average, while only taking new sells below the 50-bar average.

You can also see support and resistance even more clearly on the P&F chart. The
first line of support for DGX is at 50, with a break there opening the door for a
move to 44. Resistance overhead looks solid in the 55-56 area.

For more information on Point & Figure charting, check out www.dorseywright.com or
www.chartcraft.com, which both offer excellent focus on P&F charts.


SUPPORT RESISTANCE
Nasdaq Composite 1260 1300
S&P 500 815 845
Dow Industrials 7765 7965