A point and figure chart can look like a mangled sea of Xs and Os, so lets try to make some sense of it by walking through the stock of the day, Cisco.
Cisco Point and Figure Chart
Cisco starts out a little confusing, so bear with me. Back in late December, Cisco issued a sell signal (point 1). That signal was quickly reversed by the next column of Xs exceeding the high of the previous column of Xs (point 2). The buy signal remained in place for a couple of weeks, until point 3.
Like any technical tool, just using buy and sell signals can generate whipsaws when prices are consolidating. To combat this you can use trend lines, support, and resistance to help put buy and sell signals in perspective. Notice how between points 1 and 3, Cisco was trapped between resistance at $44, and an up trend of higher lows. When that up trend was broken and the next column of Xs was unable to get back above it, it spelled trouble for Cisco.
The sell signal (point 3) remained in place until the April rally hit (buy signal at point 4). Once again Cisco consolidated, and a sell signal was issued at point five.
So where are we now? Point 6 has issued a buy signal, with a bullish price objective of $30.50. Before that goal can be obtained, CSCO is going to have to get above resistance between $20 and $21. If CSCO comes out with bad news and prices fall to $17.50, a sell signal will be generated, canceling the bullish price objective. Notice how once again we have a series of higher lows to support rising prices and resistance trying to hold prices down, who will win?