April 3, 2025
When multiple Point & Figure (P&F) charts show double bottom breakdowns simultaneously, as happened this morning, it signals that large-scale selling by institutional investors is overwhelming market demand. Significant additional declines usually follow this bearish trend in stock prices.
Why It Matters
A Clear Signal of Weakness
Point-and-figure charts focus purely on price movements, filtering out market noise. A double bottom occurs when a “XX” column breaks below previous lows, showing strong resistance the market has failed to overcome. When this happens across multiple sectors or indices, it suggests systemic risk rather than isolated sell-offs.
Institutional Activity
I use P&F charts for the same reasons many institutional investors, e.g., hedge funds and pension funds, use P&F charts, because they provide clear, objective trend signals. If these heavy-weight investors are simultaneously selling and multiple charts show synchronized breakdowns, it signifies coordinated risk reduction. High trading volumes confirm urgency among institutional sellers, and this morning the Mag-7 stocks are running 2x to 4x average volumes with prices down by -8% or more in some cases.
Bearish Momentum Builds
Point & Figure charts allow for downside price targets based on past movements. For example:
- If major indices like the S&P 500, Nasdaq 100, and Russell 2000 simultaneously break down, the sell-off can readily accelerate due to algorithmic trading amplifying the trend.
- A breakdown could predict a decline of 1–2 times the prior column’s height.
Example: Amazon (AMZN)
- The height of the O column (down moves) before the double bottom breakdown is 6 boxes, with the breakdown at 184. So Target 1 is 172 and Target 2 is 162. AMZN at the moment is 181. That may or may not happen; however, it’s the typical analysis of PnF chart users.
Examples from Recent Years
- 2018 Q4: FAANG stocks had simultaneous P&F breakdowns, leading to a 20% correction in the S&P 500.
- 2020 Feb: Travel and energy sectors showed double bottoms before COVID-19’s March market crash.
How Investors Can Respond
Active Traders
- Sell into rallies that hit Pivot Point resistance levels.
- Tighten stop-loss orders on any long positions.
Portfolio Managers
- Raise cash reserves and use protective strategies like put spreads or VIX futures to hedge against declines.
Be Cautious of False Signals
- If breakdowns occur on low trading volumes, they could indicate a bear trap—a deceptive signal that prices may reverse upward. Today’s volume, however, is quite active.
The Bottom Line
Multiple P&F double bottom breakdowns are an early warning of increased market risk. While markets may reverse at any time, ignoring these signals is like ignoring a fire alarm in a skyscraper—a risk never worth taking. Until buying demand returns, positioning defensively is the smartest choice.