Using Trendlines with a Point & Figure Chart

Trendlines are lines drawn along the tops or bottoms of prices in the direction of the prevailing trend. In the case of an up trend, the trendline should connect three or more lows, and in the case of a downtrend, the trendline should connect three or more highs.

Trendlines are considered important tools for identifying false breakouts and trend reversals. As long as a trendline is not broken, you can be confident you are on the right side of the market. Once the trendline is penetrated, it may indicate a trend reversal. Most analysts agree that the two most important trendlines to watch with Point & Figure charting are the Bullish Support Line and the Bearish Resistance Line.

Bullish Support Line

Drawing a Bullish Support Line on a Point & Figure chart requires you to find the lowest point made after the completion of a bear market, or a significant down move, and extend the line upward and to the right at a 45-degree angle. Once the line is finally penetrated on the downside, all bullish positions in the market should be closed out. Drawing a Bearish Support Line requires you to find the highest point once a bull market has peaked, and use it as the starting point for the trendline.

Bearish Resistance Line

Drawing a Bearish Resistance Line requires you to find the highest point once a bull market has peaked and use it as the starting point for the trendline, and then extend the line downward and to the right at a 45-degree angle. Drawing a Bullish Resistance Line on a Point & Figure chart requires you to find a bullish breakout chart pattern, then retrace to a wall of Os and start the resistance line one box above the column of Xs to the immediate right of the wall of Os.

 For more information on trendlines, see What is a Trend? and Trendline Drawing Object.