Wheat, First Securities

“A long time ago in a galaxy far far away” I was running three separate departments at then Richmond-based Wheat, First Securities. Subsequently, Tom Dorsey and Watson Wright decided to leave Wheat, First and form the now legendary firm of Dorsey Wright. When they left, that department fell under my management. Prior to their departure Tom and Watson were in charge of the options strategy department and the options trading desk. Pursuant to that job was that after the stock market’s close they “posted up” all the optionable stocks (puts and calls) traded on the various exchanges using the Point & Figure (P&F) charting system. For those unfamiliar with P&F charts we offer this explanation from Investopedia:

Conventional technical-analysis charts tend to be the open-close/high-low chart. In the creation of P&F, the emphasis is only on the closing price of an issue. The developers of P&F charting were interested in trend development and thus were concerned not with the noise created daily by minor moves up or down, but with the larger picture and how that plays out in the areas of supply and demand. The key to P&F charts is the establishment of the unit of price, which is the unit measurement of a price movement that is plotted on the graph. On P&F charts, there is no time axis, only a price axis. Rising stock prices are shown with X's and falling prices are shown with O's. These points appear on the chart only if the price moved at least one unit of price in either direction. So say the closing prices of a stock moved up one price unit three times. This would appear as a column of three X's. If the price movement reverses direction, the chart shows a new column of O's, wherein an O is plotted for each unit of price movement. X's and O's never appear in the same column.

Andrew and I revisit this discussion of P&F charting this morning because we received a very interesting P&F chart from a particularly savvy financial advisor on Friday as crafted by, you guessed it, the astute folks at Dorsey Wright (Chart 1). Now, recall our discussion of the Dow Theory “sell signal,” which occurred on April 9, 2018. That was when the D-J Transportation Average fell below its February 9, 2018 closing low thus confirming a similar break by the D-J Industrial Average. Recall the Industrials violated their respective February low on March 23. Also recall the longer it takes for one index to confirm the other index the less valid the signal, a point many alleged Dow Theorists fail to recognize. In the current case it took over two weeks for the Transports to confirm the Dow’s breakdown, which is one of the reasons we chose to ignore the “sell signal.” Another reason we turned a blind eye to said signal is because it came on aberrational news, which was the same thing that happened with Flash Crash 1 (May 2010) and Flash Crash 2 (August 2015), both of which generated false DT “sell signals.” As often stated in these missives, “Dow Theory is not always right, and it is subject to interpretation, but it is right a lot more than it is wrong!”

Returning to the P&F chart we received last Friday, study the attendant chart and notice that in this chart the D-J Industrials, as represented by the Dow “Diamond” ETF (DIA/242.95), did not violate the February low. In fact, it looks to us as if the Industrials actually made a double-bottom chart formation (see circles on the chart). The chart also shows a “high pole warning,” which is suggestive of a trading top. Following the “high pole warning” the chart shows the sideways consolidation the Industrials have been in ever since those February lows. As often stated, we continue to treat the February 9, 2018 low, of ~2533, as THE low until proven wrong.