A count is a form of technical analysis that utilizes point and figure charts to make estimations on the vertical movement of stock prices. Count analysis uses X’s to represent price increases and O’s for price decreases. Analysts base count calculations on historical sideways price movements and use them to determine the probability that a price target can be reached.
When using count analysis, the X’s and O’s that represent price increases and decreases are used with a traditional scale and a previously determined reversal amount. Traders use this to determine if certain positions are profitable. Investors are also able to review the sequence of fluctuations in price and to estimate how prices are likely to move in the future.
There are several varieties of count methods to use. Three specific count analysis methods retain significant importance to traders and investors.
The breakout count method that is used to find a bullish price objective must be used with an active P&F buy signal. There are four steps to this method. First, the most active sell signal (aka Double Bottom Breakdown) must be found on the P&F chart, working from right to left. Second, working to the right of this signal, the next buy signal (aka Double Top Breakout) must be found. The column producing this signal is key because it becomes the measure column. Third, the height of the measure column must be calculated and multiplied by the box reversal amount. Fourth, the total of this calculation must be added to the low of the column to the left of the measure column.
There is also a breakout count method used for bearish price objectives.
The reversal count method can also be used to find both bullish and bearish price objectives. There are three steps used to find bullish prices. It must be used with an active P&F buy signal. First, working from left to right, the most recent P&F sell signal must be found. The X column next to the sell signal becomes the measure column. Second, the height of the column must be calculated and multiplied by the box reversal amount. Third, the total must be added to the low of the column to the left of the measure column.
A congestion pattern or reversal must form on a P&F chart before this method can be considered. There must be a congestion pattern that can be defined, is a minimum of five columns wide and must have a column that breaks the congestion. The columns in this pattern must be counted. This is the width. After the breakout column occurs on the P&F chart, analysts can multiply the width by the box size and the reversal amount to estimate price extension. The extension is added to the low of the pattern for a price objective.