It is different than the RSI indicator. You take two stocks and divide one by the other, say stock X divided by stock Y. If this ratio is rising, then the stock X is outperforming stock Y. Where the PnF method comes in is that they take this ratio, multiply it by 100, and then chart it using the PnF method. If the chart is in X's, again stock X is out performing stock Y; if in the chart is in O's, then stock Y is going to outperfrom stock X.
A good example might be taking the IYY and the AGG ETF's and plot this ratio on a PnF chart. On the Stockcharts.com, you would used the Percentage setting, with a 3.25 box size, 3 box reversal. Here is what is would look like:
What this is telling you is that since Aug 07 (see the 8 on the top of the current column of O's) bonds have been outperforming the broader markets. From a portfolio point of view, you might want to be overweight in bonds, and underweight in stocks, or at least until this ratio reverses.
You could take this a step further and find what size cap you would want to be in (small, mid, or large) I have not done this, but from the podcasts on the DWA website, large caps are now out performing small and mid caps (flight to quality?). So, perhaps for the portion of your portfolio that was in stocks, you might want to be in large cap.
More than you asked for, but really interesting stuff. I currently have 2/3 of my 401(k) money in their fund, DWAFX. They do this type of analysis to re-balance the fund in fixed income, domestic, international, and alternative (commodities) asset classes, and they only use ETF's. Over the last month that I have held this fund, it is down 4.5%, while the SPX is down about 8%. Still down, but less than the SPX; it has outperformed.
Looks like your short is making you some money today (I think you said you were short?). I bailed on my SSO this morning for a small lose. After looking at the charts last night, I was not comfortable with things. There is always tomorrow.
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