Sentiment Indicators - Renko, Price Break, Kagi, Point and Figure: What They Are and How to Use Them to Trade

Chapter 4. Applying Price Break Charts to Markets and Data

This chapter will demonstrate several market examples, using the general strategies we discussed in Chapter 3.

S&P 500: Price Break Chart Patterns Using the Day Chart

Price break charting of the S&P 500 provides a very good example of the applications of price break charts. Looking at Figure 4.1, we can easily see that the S&P experienced clear sequences of consecutive lows with reversals that were short in duration. After August 11, 2008, a reversal sequence started with six consecutive new daily lows. This was followed by a counterreversal of one block. It flip-flopped and began a seven-consecutive-low sequence, followed by a counterreversal of four consecutive highs.

Figure 4.1. Three Line Break Chart of Daily S&P 500.: Source: Bloomberg

Let's stop here for a moment and consider some history. On November 4, 2008, a trader using technical analysis could have sensed that the prevailing sentiment was bearish. However, he could not have known when or if a reversal back to the downtrend would occur. He could, and did, know where it would occur. If the trader counted back three bullish blocks, he would have seen that the line low of the third block was 940.51 on October 28. Therefore, applying a strategy of "join the trend upon a break of low of the three previous white lines," the trader would have placed a sell stop at 940.00. ...