Now that we have had a look at how to construct a P&F chart, the next question is how do we read it. It is clearly understood by P&F experts that the law of supply and demand determines the price of the stock. If the issue is rising in price and we have an uptrend in place with at least three X’s, we believe that demand has overcome supply. The reverse, when that chart gives us three O’s, indicates supply has overcome demand. P&F charts show us the establishment of trends, trend reversals, and the supply and demand of charted issues.
This look will give you a solid base to further study two important principles of P&F charting: support levels and resistance levels.
SUPPORT LEVELS
A support level is a level at which investors and traders alike believe prices will start to move higher after hitting the support mark. Have a look at the three O’s in the example above to see what this means. A horizontal row of O’s is what you are looking for when zeroing in on a trend reversal and an uptrend to begin.
RESISTANCE LEVELS
A horizontal row of X’s marks the resistance levels you need to be looking for in the P&F charting study. Studies of trendlines have shown that a break through resistance levels generally occurs with great gusto, that is, with big volume and a rapid increasing stock price.