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Relative Strength and Have a Good Probability of Outperforming the Market Dorsey Wright Reference Manual About the Company Dorsey, Wright & Associates (DWA) is an independent and privately owned registered investment advisory firm founded in 1987 whose business includes two areas -- investment research services for numerous broker-dealers and large institutions around the world, and professional management of equity portfolios for investors. The two principals of the firm, Thomas J. Dorsey and Watson H. Wright, have extensive experience in the equity markets, particularly in the field of risk management. Combined, Mr. Dorsey and Mr. Wright have over 45 years of experience in the equity and options markets. Tom Dorsey is the author of Point & Figure Charting: The Essential Applications for Forecasting and Tracking Market Prices, Thriving As A Stockbroker in the 21st Century and Tom Dorsey’s Trading Tips: A Play Book for Stock Market Success. As well, the second edition of Point & Figure Charting was released in the summer of 2001. Point & Figure Charting has been translated into German, Polish, two dialects of Chinese, Hindu, and Japan has just purchased the rights for translation. Tom Dorsey and Tammy DeRosier, Vice President, also appear regularly on CNBC’s “Taking Stock” Program and Bloomberg TV. Dorsey, Wright analysts are featured on several national radio shows weekly too. Dorsey, Wright research is conducted along technical lines, adhering to the relationship between supply and demand. We believe this simple economic theory is manifested as a constant battle between these two forces for control of the equity vehicle. It is this objective, logical approach which helps reduce uncertainty in the market. The mainstay of the research at DWA is the Point & Figure methodology which was first popularized by Charles Dow in the late 1800’s. The Point & Figure methodology is a logical, sensible and organized way of recording the supply and demand relationship in the market, sectors, and individual stocks. We believe our Research, coupled with your own fundamental research, can greatly increase your probability of success in the stock market. Many sites on the Internet may provide charts of stocks but DWA is the only site that provides such a comprehensive charting site with portfolio capabilities and most importantly, the ANALYSIS that goes with the charts. Each analyst at DWA has been with the firm an average of almost 11 years. Each day the analysts put together a comprehensive report which features analysis of the markets, sectors, individual stocks, options, and prospecting. The services of DWA make investment professionals craftsman who know how to manage risk and add value for their clients. Investment Strategy Our philosophy, the combination of fundamental analysis with technical analysis, can help stack the odds in your favor. It’s like a musician playing the piano. Restrict him to playing the piano with one hand the music he makes is going to be marginal at best. Let him play the piano with both hands, fundamentals and technicals, and he will make beautiful music. Fundamentals can help answer the question of WHAT to buy and technicals answer the question of WHEN to buy. We use our primary market indicators to get a measure of overall risk. Dorsey, Wright uses technical market indicators that have been in existence for over forty years to ascertain the overall risk in the market -- to determine whether offense or defense is dictated. We then analyze our broad industry sectors to determine which sector or sectors have good field position. Industry sectors can move in and out of season just like produce in the supermarket. We then select individual stocks that have positive relative strength and have a good probability of outperforming the market. In other words, demand is in control. Ascertain Market Risk > Determine Offensive Sectors > Fundamentals > Manage the Trade with the Point & Figure Chart Why Point and Figure Charts P&F charts are indigenous to stock market trading which give you both the immediate and long term view. Formations, patterns and signals are easy to recognize and interpret, and tend to repeat themselves. Trends are readily identified and trendlines can be drawn with amazing ease. Valid targets can be established. It is the easiest kind of chart to maintain and therefore allows you to follow more stocks. It should enable the investor to stay on a winner while it is winning and get off a loser quickly. The method is dynamic. The fixed interval of plotting may be made to fit whatever you want to chart - stocks, bonds, commodities, speculation or investment. It ignores the static time factor, the confusing volume indications, and irrelevant minor fluctuations. Point and Figure Chart Basics The basic point and figure chart shows a column of X's which means the stock or index is rising. A column of O's means the stock is falling. Columns of X's and O's alternate back and forth -- they never appear in the same column. For the first action taken in a month, a number or letter is used to designate that particular month. This is how we show the time on the chart. It takes 3 boxes to reverse from one direction to the other. For example, if a stock were trading in a column of X's with a top of 45, it would take a move to 42 to reverse this chart to a column of O's. Going in the other direction, if a stock were trading in a column of O's with a current low at 45, it would need a rally to 48 to reverse the stock back to a column of X's. Units of Charting : 0 - 5 = 1/4 point per box 5 1/2 - 20 = 1/2 point per box 21 - 100 = 1 point per box 102 – 200 = 2 points per box 200 + = 4 points per box Instructions Given the price of security XYZ, determine the box value and write the appropriate range of prices in the left margin of the point and figure grid. Start the chart with the number (or letter) corresponding to the present month and place it in the box with the value equal to the previous day’s closing price. Depending on whether the stock price rises or falls during the day, add Xs or Os as required. If the price does not rise or fall the value of one or more boxes, make no chart entry. If the last entry on the chart is an X, check the stock’s daily high. Add Xs if the stock has gone up one or more units on your grid. If the stock has gone down, look at the daily low to see if a three box reversal has occurred. If so, move over one column and down one row and enter the appropriate number of Os. Make no chart entry if the stock has not moved up enough to warrant more Xs or down enough to receive at least three Os. If the last entry on the chart is an O, check the stock’s daily low. Add Os if the stock has gone down one or more units on your grid. If the stock has gone up, look at the daily high to see if a three box reversal has occurred. If so, move over one column and up one row and enter the appropriate number of Xs. Make no chart entry if the stock has not moved down enough to warrant more Os or up enough to receive at least three Xs. Reference to time is made by entering the first action of each month with that month’s number in the grid. For example the first X or O in May would be replaced with a "5". The months October through December are noted by A, B, and C, respectively. It is also useful to write the year below the column in which there is an entry for January of that year. Here are two examples of how a chart develops. EXAMPLE I: START WITH HIGH: 30 HIGH: 29 3-4 HIGH: 30 3-4 HIGH: 31 1-2 LOW: 29 1-4 LOW: 27 LOW: 26 1-8 LOW: 29 3-8 (Move the chart (Move over one (Move over one (Move the chart up one box -- column and column and put up one box -- put an X at 30) put 3 O's in 3 X's in at put an X at 31) at 29,28 27) 28, 29, 30) 31 31 31 31 31 X 30 30 X 30 X 30 X X 30 X X 29 X 29 X 29 X O 29 X O X 29 X O X 28 X 28 X 28 X O 28 X O X 28 X O X 27 X 27 X 27 X O 27 X O 27 X O 26 X 26 X 26 X 26 X 26 X 25 25 25 25 25 EXAMPLE II: START WITH HIGH: 27 1-4 HIGH: 29 3-4 HIGH: 29 1-8 HIGH: 29 1-4 LOW: 25 7-8 LOW: 27 5-8 LOW: 26 LOW: 25 (Move the chart (Move over one (Move over one (Move the chart down one box - column and column and put down one box - put an O at 26) put 3 X's in 3 O's in at put an O at 25) at 27,28,29) 28, 27,26) 31 31 31 31 31 30 O 30 O 30 O 30 O 30 O 29 O 29 O 29 O X 29 O X 29 O X 28 O 28 O 28 O X 28 O X O 28 O X O 27 O 27 O 27 O X 27 O X O 27 O X O 26 26 O 26 O 26 O O 26 O O 25 25 25 25 25 O Chart Patterns There are 11 different patterns in the Point & Figure methodology.
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