|
ProSticks - Learning Curve
Apple Daily --- June 11, 2000
Trendline Drawn From Modal Point
Trendlines are one of the most popular tools used in technical analysis. There are
two types of trendlines: support lines and resistance lines.
During an uptrend, two previous major lows are identified and connected to
form a support line. According to the theory, when the price drops and
breaks through this support line, a downtrend results. Similarly, during a
downtrend, two previous major highs are joined together to form a resistance
line. A bull trend is signalled when the price breaks this resistance line as
in Figure 1 below.
However, traditional trendlines are notorious for frequent false breaks.
Figure 1 shows a Modal Line chart for China Telecom (0941). A Modal Line chart
resembles the traditional line chart. However, unlike the latter, it is drawn by connecting
Modal Points together instead of the closing prices. A resistance line is drawn
(marked L1) during the prevailing downtrend. As can be seen, when the price
broke above the resistance line, a strong rally resulted.
Now take a look at Figure 2. L2 is the resistance line drawn using the
traditional approach, connecting two previous major highs, A
and B together. L1 is the resistance line drawn as in Figure 1.
As can be seen, the price broke above L1 at roughly $51 while it pierced
above L2 at approximately $55. Thus, an investor using L1, drawn with
Modal Points, will go long earlier than using the L2 line drawn using the
traditional approach. Since most technical analysis followers will use L2 as the
resistance line, using L1 in anticipation of a subsequent breakout allows
one to have a bigger buffer for his position should the breakout be false. In short, L1
is the hidden trendline which is not visible on the traditional Bar or
Candlestick chart. It can be drawn using only ProSticks' Modal Points.
Modal Points are price levels that are the most heavily traded
and thus represent significant market forces. When two important
Modal Points are connected together to form a trendline, the price
levels on this trendline are where future support and resistance should reside.
Sometimes a trendline drawn using Modal Points and a trendline drawn using traditional
highs and lows may intersect together. In this case, the intersection points will
represent extreme support and resistance levels, which when broken, issues a red
flag to the market. The chance for a false break is minimal.
| 
