a point and figure introduction
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Point & Figure Analysis
The analysis in this presentation is known as a technical analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions. Please be aware that Dorsey Wright research can and will differ from the research provided by Wells Fargo Advisors own technical analysts.
Wells Fargo Advisors, LLC is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. CAR 0209-2697
J Duncan Black, M.B.A.Senior Vice President - InvestmentsPIM Portfolio ManagerWells Fargo Advisors900 Elm StreetManchester, NH 03101603-644-0646
Securities and Insurance Products:Not Insured by FDIC or any Federal Government Agency
May Lose ValueNot a Deposit of or Guaranteed by a Bank or Any Bank Affiliate
Point & Figure Analysis
A Disciplined Approach to Buying and Selling Stocks, ETF’s, and
Mutual Funds
The Company fundamentals looks great. All the analysts love it. So why is the stock going down?
© Point & Figure Coaching and Research GmbH
Fundamental Analysis vs. Technical Analysis
1. What to Buy2. Company
Management3. Earnings Quality4. Price/Earnings Ratio5. Product Acceptance
1. When to Buy2. Trend Analysis3. Relative Strength4. Momentum5. When to Sell
What is Fundamental Analysis?
What is Technical Analysis?
© Dorsey, Wright & Associates 2009
Supply and Demand
We all understand the basic forces of supply and demand.
The same forces that affect prices in the supermarket also affect prices in the stock market.
Stocks, sectors, and asset classes move in and out of favor just like produce in the supermarket. © Dorsey, Wright & Associates 2009
© Dorsey, Wright & Associates 2009
© Dorsey, Wright & Associates 2009
ORIGINAL POINT & FIGURE CHARTORIGINAL POINT & FIGURE CHART
Point & Figure BasicsX’s = Price is rising
O’s = Price is falling
Alternate columns of X’s and O’s
Minimum of 3 X’s or O’s in a column
Time = First action in month use number. (1 for January, etc.)
Use daily high & low for charting price action.
© Dorsey, Wright & Associates 2009
Chart Source: www.dorseywright.com
© Dorsey, Wright & Associates 2009
Chart Source: www.dorseywright.com
Stock (XYZ)
© Dorsey, Wright & Associates 2009
Did the fundamental analysts learn from the 2000-2002
Technology Bubble?
The following is a quote from the February 9th New York Times article,
“Why Analysts Keep Telling Investors to Buy”
“At the top of the market, they urged investors to buy or hold
onto stocks about 95 percent of the time. When stocks stumbled, they stayed
optimistic. Even in November, when credit froze, the economy
stalled and financial markets tumbled to their lowest levels in a decade, analysts as a group
rarely said sell. “ Chart Source: www.dorseywright.com
© Dorsey, Wright & Associates 2009
Chart Source: www.dorseywright.com
© Dorsey, Wright & Associates 2009
Chart Source: www.dorseywright.com
Causes of Price Movement
Market and sector forces together typically cause 80% of the price movement in a stock. That means the company fundamentals usually account for less than 20% of a stock’s price movement. This is the reason a company’s stock price sometimes seems to move independently of the fundamentals!
Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King© Dorsey, Wright & Associates 2009
Typical Resource Allocation
Most people, however, spend 80% of their time on stock evaluation and only 20% on sector and market evaluation.
In other words, they ignore where the greatest amount of risk lies – the market and sector forces.
Source: “The Latent Statistical Structure of Securities Price Changes” Benjamin F. King
© Dorsey, Wright & Associates 2009
The Five-Step Game PlanStep 1: Market AnalysisStep 2: Sector AnalysisStep 3: Fundamental AnalysisStep 4: Technical ResearchStep 5: Risk management and
Follow-up
© Dorsey, Wright & Associates 2009
© Dorsey, Wright & Associates 2009
Step 1: Market
Analysis
The Buy-and-Hold Myth Buy the “Market” in 1929…
It took 25 years to get back to even.
Buy it in 1973…
It took 7.6 years to get back to even.
Note: Past performance is no guarantee of future success.
© Dorsey, Wright & Associates 2009
© Dorsey, Wright & Associates 2009
Source: http://www.nytimes.com/interactive/2009/01/06/business/20090106-comeback-graphic.html
© Dorsey, Wright & Associates 2009
Leg #1: Equity Exposure and Managing the Trade
Leg #2 & #3: Two of the Following Domestic Equities International Equities Commodities Foreign Currencies Fixed Income Cash
3 Legged Stool Approach to “How Offensive or Defensive Should I
Be?”
Leg #1: Measuring Supply & Demand
Double Top
One column of X‘s exceeds a previous column of X‘s.
Double Bottom
One column of O‘s exceeds a previous column of O‘s.
39 O
38 O
37 O
36 O
35 O X
34 O X X
33 O X O X
32 O X O X
31 O O
30
39
38 X X
37 X O X O
36 X O X O
35 X O O
34 X O
33 X
32 X
31 X
30 X© Dorsey, Wright & Associates 2009
Leg #1: NYSE Bullish Percent
© Dorsey, Wright & Associates 2009
• X’s = Offense – Wealth Accumulation
• O’s = Defense – Wealth Preservation
• Two Lines of Demarcation: 30% and 70%
• Measures Risk in the Market
• Does not have to move in tandem with the S&P 500 or the Dow Jones.
Chart Source: www.dorseywright.com
Leg #2 & 3: Compare One Asset Class to
Another
© Dorsey, Wright & Associates 2009
US Stocks CashFixed
Income
Int’l StocksForeign
Currencies
Commodities
The Way Investors Invest --
Who Do You Believe is Going to Be a Better Football Team Next Year?
The Way Investors Invest --
Who Do You Believe is Going to Be a Better Football Team Next Year?
• All major sports have a ranking system. The Point & Figure Relative Strength tool is the ranking system we use.
• Daily Calculation:
Cash X 100 = Relative Strength
US Stocks Reading
• This reading is plotted on a Point & Figure chart which then tells us whether we want to be in cash or US stocks
Relative Strength Calculation
Relative Strength Calculation
Cash or Stocks?
© Dorsey, Wright & Associates 2009
Relative Strength: A Ranking System
• X’s = Cash – Wealth Preservation
• O’s = Stocks – Wealth Accumulation
Cash: 2001-2002
Cash: 2008-Present
Chart Source: www.dorseywright.com
Cash or Commodities?
© Dorsey, Wright & Associates 2009
Relative Strength: A Ranking System
• X’s = Cash – Wealth Preservation
• O’s = Commodities – Wealth Accumulation
Date Range ColumnCash - Money Market
Continuous Commodity
Index
7/15/98 - 10/15/02 X - Cash 18.41% 10.11%
10/15/02 - 8/15/08 O - Commod. 16.87% 115.71%
8/15/08 - 1/31/09 X - Cash 0.23% -26.97%
Chart Source: www.dorseywright.com
Leg #2 & 3: Asset Class Evaluation
© Dorsey, Wright & Associates 2009
XX
Equity
Commodities
Fixed Income
Int’l
Cash
Reaching Your Destination
Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Dorsey, Wright & Associates developed the indicators described in this presentation. They have been prepared without regard to any particular investor’s investment objectives, financial situation and needs. Accordingly, investors should not act on any recommendation (expressed or implied) or information in this presentation without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions
Any statements nonfactual in nature constitute only current opinions and interpretations of their indicators, which are subject to change without notice. There may be instances when fundamental, technical and quantitative opinions may not be in concert. This and/or the accompanying information was prepared by or obtained from sources that Wachovia Securities believed to be reliable but does not guarantee its accuracy. Any opinions expressed or implied herein are not necessarily the same as those of the Wachovia Securities research department. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Data and opinions are current as of May 19, 2009. Additional information is available on request.
© Point & Figure Coaching and Research GmbH
Copyright © 2009 Copyright © 2009 Dorsey, Wright & Associates, Inc.Dorsey, Wright & Associates, Inc.
Keep in mind that there is no assurance that this or any strategy will ultimately be successful or profitable.
© Point & Figure Coaching and Research GmbH
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