32 PNF 3

Secrets of Point and Figure Distribution
The procedure for the horizontal PnF counting of Distribution follows the same logic as
counting Accumulation. A cause is built during Accumulation and Distribution that
results in a trend. Point and Figure chart construction allows us to estimate the extent
of a trend. This adds a powerful tactical tool to our trading arsenal. Point and Figure
provides a method for calculating reward to risk potential. The reward being calculated
is the count objective estimated in the horizontal count. The risk is the strategic stop
placement (entry price minus the stop). Reward to Risk is the price objective divided by
the risk. Using this Point and Figure concept of reward to risk calculation becomes a
standard procedure for Wyckoffians. A three to one reward to risk parameter is
considered the minimum threshold for a trade. My counsel is to base this three to one
minimum on a conservative point and figure objective, and not on the mega-counts
that are possible on large Distribution formations.
Another powerful benefit of PnF is the ability to evaluate two comparable investments
and gauge the potential of each with the calculation of their respective count
objectives. A Wyckoffian might be considering two housing stocks. Housing stock A
has a 3 to 1 reward to risk in the count objective, while housing stock B has a 4 to 1
count objective. There is more of a cause built in stock B, and on balance, it has better
potential.
We plot our price charts from left to right. We count Distribution (like Accumulation)
from the right to the left. From the End of Distribution to its beginning. Typically,
Distribution ends with two events. First a Sign of Weakness (SOW), where the stock
price dips below the prior lows of the trading range. Then a rally of poor quality lifts
prices back into the Distribution area on low volume and narrow price spread. This rally
is labeled a Last Point of Supply (LPSY). Demand of poor quality and overhead supply
will prevent the LPSY from reaching the highs of the Distribution trading range (the
exception being the Up Thrust After Distribution, UTAD). We then locate the Buying
Climax (BCLX). A BCLX will be accompanied by a spike in volume, indicating that large
sellers are beginning to liquidate holdings. It takes time to liquidate large holdings and
thus the formation of a range of Distribution. The volatile up and down swings will
produce columns of sideways trading range on a PnF chart. We count the PnF columns
from the LPSY to the BCLX to obtain our count objective.
The areas of LPSY, SOW, ST, AR, BCLX and PSY are all determined from vertical bar
chart analysis and then transferred to the PnF chart. Note that each of these points are
rally peaks within the Distribution (except the AR). Each rally peak is a place where
price is overcome by supply which checks the advance. Supply coming in at a price is
what creates a trading range of distribution. The Last Point of Supply is where the last
of the remaining demand is met by selling from large interests. After the LPSY, the
stock price slides through the bottom of the trading range and the markdown begins.
The count procedure is to begin counting at the Last Point where Supply (LPSY) is
present to the first place where supply is present which is either the Buying Climax
(BCLX) or the Preliminary Supply (PSY). Therefore, we always count from an up column
of xs, to an up column xs when determining the size of the Distribution. These are the
counting guidelines.
The final LPSY is the place where overwhelming supply stops the advance and there is
no quality demand to prop up prices. Price cascades down and out of the Distribution
zone in a Markdown. Support is nonexistent and the price falls freely. In the $INDU
case study we use a 3-Box Reversal method PnF chart.
The Count Line is drawn from the peak of the LPSY to the BCLX. The count in this
case is 15 columns multiplied by the 3-box method, multiplied by 50 point scale, which
equals 2,250 points. Subtract this from the highest peak (17,950) and the count line
(17,750) to calculate the count objective. In this example, the $INDU is within striking
distance of the 15,700 to 15,500 target window. A Wyckoffian will look for the signs of
stopping action around the price objective target zone. This helps to confirm that the
counts are relevant. Recall that stopping action begins with a Selling Climax, Automatic
Rally and Secondary Test. It is prudent not to attempt to catch the falling knife of
climactic declines, as they can fall further and longer than expected. Reaching a price
objective can result in an extended pause that is followed by a continuation of the
trend. Note in the prior blog on Accumulation (click here for a link) how stopping action
was followed by base building, which takes time, and also can be counted with the PnF
Method.
All the Best,
Bruce

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Secrets of Point and Figure Distribution

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