Question

Question: Construct a point and figure chart for Computers, Inc., using again the data in Table 9.3. Use $2 increments for your chart. Do the buy or sell signals derived from your chart correspond to those derived from the moving-average rule (see the previous problem)?

Short answer

Answer

Yes - Sell signal.

Not same – Buy signal

Step-by-step solution

Constructing a point and figure chart

Let’s use the following data to construct the point and figure chart:

Trading Day	5 Day Morning average
Days 1–5	(19.63 + 20 + 20.50 + 22 + 21.13)/5 = 20.652
Days 2–6	(20 + 20.50 + 22 + 21.13 + 22)/5 = 21.126
Days 3–7	(20.50 + 22 + 21.13 + 22 + 21.88)/5 = 21.502
Days 4–8	(22 + 21.13 + 22 + 21.88 + 22.50)/5 = 21.902
Days 5–9	(21.13 + 22 + 21.88 + 22.50 + 23.13)/5 = 22.128
Days 6–10	(22 + 21.88 + 22.50 + 23.13 + 23.88)/5 = 22.678
Days 7–11	(21.88 + 22.50 + 23.13 + 23.88 + 24.50)/5 = 23.178
Days 8–12	( 22.50 + 23.13 + 23.88 + 24.50 + 23.25)/5 = 23.452
Days 9–13	(23.13 + 23.88 + 24.50 + 23.25 + 22.13)/5 = 23.378
Days 10–14	(23.88 + 24.50 +23.25 + 22.13 + 22)/5 = 23.152
Days 11–15	(24.50 + 23.25 + 22.13 + 22 + 20.63)/5 = 22.502
Days 12–16	(23.25 + 22.13 + 22 + 20.63 + 20.25)/5 = 21.652
Days 13–17	(22.13 + 22 + 20.63 + 20.25 + 19.75)/5 = 20.952
Days 14–18	(22 + 20.63 + 20.25 + 19.75 + 18.75)/5 = 20.276
Days 15–19	(20.63 + 20.25 + 19.75 + 18.75 + 17.50)/5 = 19.376
Days 16–20	(20.25 + 19.75 + 18.75 + 17.50 + 19)/5 = 19.050
Days 17–21	(19.75 + 18.75 + 17.50 + 19 + 19.63)/5 = 18.926
Days 18–22	(18.75 + 17.50 + 19 + 19.63 + 21.50)/5 = 19.276
Days 19–23	(17.50 + 19 + 19.63 + 21.50 + 22)/5 = 19.926
Days 20–24	(19 + 19.63 + 21.50 +22 + 23.13)/5 = 21.052
Days 21–25	(19.63 + 21.50 + 22 + 23.13 + 24)/5 = 22.052
Days 22–26	(21.50 + 22 + 23.13 + 24 + 25.25)/5 = 23.176
Days 23–27	(22 + 23.13 + 24 + 25.25 +26.25)/5 = 24.126
Days 24–28	(23.13 + 24 + 25.25 + 26.25 + 27)/5 = 25.126
Days 25–29	(24 + 25.25 + 26.25 + 27 + 27.50)/5 = 26.000
Days 26–30	(25.25 + 26.25 + 27 + 27.50 + 28)/5 = 26.800
Days 27–31	(26.25 + 27 + 27.50 + 28 + 28.50)/5 = 27.450
Days 28–32	(27 + 27.50 + 28 + 28.50 + 28)/5 = 27.800
Days 29–33	(27.50 + 28 + 28.50 + 28 + 27.50)/5 = 27.900
Days 30–34	(28 + 28.50 + 28 + 27.50 + 29)/5 = 28.200
Days 31–35	(28.50 + 28 + 27.50 + 29 + 29.25)/5 = 28.450
Days 32–36	(28 + 27.50 + 29 + 29.25 + 29.50)/5 = 28.650
Days 33–37	(27.50 + 29 + 29.25 + 29.50 + 30)/5 = 29.050
Days 34–38	(29 + 29.25 + 29.50 + 30 + 28.50)/5 = 29.250
Days 35–39	(29.25 + 29.50 + 30 + 28.50 + 27.75)/5 = 29.000
Days 36–40	(29.50 + 30 + 28.50 + 27.75 + 28)/5 = 28.750

As is seen in table above, the stock price is approximately $19 in the beginning. Using $2 increments, let’s put a cross. Similarly let’s put 0 in next column in case a price fall of $2 is noted.

Using this, thepoint and figure chart is ready as below:

Calculation of buy or sell signals

A sell signal occurs at a price of approximately $19 which is similar to a sell signal derived from the moving average rule. However the buy signals are not the same.