Relative strength in point and figure format

This chart is constructed with a

filter that completely damps out
movement that is less than three
boxes. This ensures that the
chart emphasizes the long-term
trend characteristics of the chart.
LONG-TERM 3 BOX POINT AND
FIGURE CHART OF RELATIVE
STRENGTH RS vs S&P 500
PLOTTED DAILY.
W. Clay Allen CFA Page 1 10/7/2003
You cannot manage what you do not measure

This chart covers 3.5 years. The
persistent uptrend of the past 1.5
years shows clearly.
If your objective is to out-perform a market index then
it is important to measure the components of the
portfolio in terms of that index. Most large portfolios
are measured against the S&P 500. The data must be
filtered to eliminate the noise from the market and to
focus attention on the long-term major movement.
This is the primary reason for tracking relative
strength in a filtered point and figure format


W. Clay Allen CFA Page 2 10/7/2003
Combines advantages of each method relative strength with point and figure -Damps out short-
term meaningless variation (i.e. noise) - Measures price movement relative to the market - Signal
patterns the same - Long-term orientation

It is important to avoid
responding to short-term price
action that might lead to the
premature sale of a major
winner
BUY
SIGNAL
LONG-TERM BULL
MARKET MOVE
W. Clay Allen CFA Page 3 10/7/2003
Support and resistance lines seem to be more effective

45-degree
bearish
resistance line
45-degree bullish
support line
The 45-degree risk vs return lines are a very important part of
relative strength point and figure charting. They provide a
simple and highly visual method for tracking the performance
of the stocks in a portfolio. It is very easy to categorize the
performance as acceptable or unacceptable.
W. Clay Allen CFA Page 4 10/7/2003
Industry groups and market sectors #1

QQQ NASDAQ 100 Tr.
This market basket seems to track
the relative strength just like an
individual stock. The 45-degree risk
vs return lines seem to be very
effective.


W. Clay Allen CFA Page 5 10/7/2003
Industry groups and market sectors #2

Market Dynamics will be
significantly expanding
industry group coverage in the
months ahead.
W. Clay Allen CFA Page 6 10/7/2003
Rule based system for portfolio management - Simple highly visual - easy to use more or less
objective difficult to misinterpret - Retain winners / sell losers quickly.

Major winners are able to oscillate back and forth
but remain above a steeply upward sloping trend
line drawn from a major low. Portfolio managers
can tell at a glance whether the stock is
performing adequately. When it rolls over it is
hard to miss.
W. Clay Allen CFA Page 7 10/7/2003

To return to the tutorial table of contents click mdtutor.pdf


Copyright by W. Clay Allen CFA


303-804-0507

clayallen@msn.com

THIS IS NOT IN ANY SENSE A SOLICITATION OR OFFER OF THE PURCHASE OR SALE OF SECURITIES. THE
FACTUAL STATEMENTS HEREIN HAVE BEEN TAKEN FROM SOURCES WE BELIEVE TO BE RELIABLE BUT
SUCH STATEMENTS ARE MADE WITHOUT ANY REPRESENTATION AS TO ACCURACY OR OTHERWISE.
OPINIONS EXPRESSED ARE OUR OWN UNLESS OTHERWISE STATED. FROM TIME TO TIME WE MAY BUY AND
SELL THE SECURITIES REFERRED TO HEREIN, AND MAY HAVE A LONG OR SHORT POSITION THEREIN.
PRICES SHOWN ARE APPROXIMATE.









W. Clay Allen CFA Page 8 10/7/2003