Two of the my UK stocks, Bloomsbury Publishing (LON:BMY) & Character (LON:CCT) are currently exhibiting 'pinches' in their Point & Figure charts and I'm keeping a very close eye on them both.
Firstly Point and Figure charts smooth out price action which allows you to see a more clearer view of the overall trend rather than day to day noise. A new column is only added to the chart if the price reverses by a particular distance. In the charts I've included that distance is 3%. So for a noticeable change in direction to occur the price must reverse direction against the prevailing trend by 3%.
Here's a Point & Figure chart for Bloomsbury Publishing (LON:BMY)
It includes blue up columns where the price is appreciating, red down columns where the price is depreciating. A change in columns only occurs if there's been a 3% swing. This chart also includes an 8 column moving average in red and a 13 column moving average in red. The 45 degree diagonal lines are trend lines, blue for bullish and red for bearish. Also included to highlight the pinch are Bollinger Bands around the price action.
A 'pinch' occurs when the price consolidates tightly on a Point & Figure chart. A pinch is significant it highlights strong ambivalence about the stock. What usually happens is that one side of the bull/bear battles capitulates and there is a strong reaction to that. In the case of Bloomsbury it has been swinging around in a tight pattern for a while. Both moving averages are flat. If you look left towards the centre of the chart there is long blue column, like a pole and that too came after a tightening of the price action (though I wouldn't have called that a pinch as I'd be looking for the height of the Bollinger bands to be 4 square high).
The difficulty with a pinch is that one cannot predict the direction of the sharp movement that will transpire. So there's the dilemma ... to sit and wait for it to happen and hope it goes in the direction that works for you or as some suggest better to sell out and wait for the pinch to play…
