Hong Kong Economic Journal --- 4 Sept, 2000

Today we will continue to talk about the trend in Australian Dollar.

Figure 1 shows the Prosticks chart of the Australian Dollar. As discussed last week, L1 is a strong support trendline since it passes through four Modal Points. When L1 is broken, price underwent a free-fall the next day at A.

After the free-fall at A, price consolidates around 0.5680 and 0.5760 during the next few days (the bars have been circled in the figure).

Notice that the circled bars which follow A are contained inside the Active Range of A. Notice also that though the highs and lows of some of those bars momentarily pierces the Active Range of A above and below, all their Active Ranges are embedded inside A's Active Range.

What is the implications of this?

Remember that the Active Range is the price range which contains approximately 68% of all trading activities. It is thus the price range where the aggregate buyers and sellers have agreed to trade given all the economic and political conditions of the day. In economics term, it is the market equilibrium price range?

Since all the Active Ranges of the bars following A are embedded inside A Active Range, it means that the market is in an extremely equilibrium position. Everyone agrees that A Active Range is the fair trading range. No one wants to buy above it or sell below it. An extreme market equilibrium position usually means the market is awaiting certain important news to be released. Or, it means the aggregate market players are unsure of the direction of the market and they are relunctant to trade aggressively outside the equilibrium range.

An extreme equilibrium situation such as that demonstrated in the Australian Dollar usually precedes an imminent market explosion on either side. The longer the market remains equilibrium, the more explosive be the subsequent market explosion.

We usually cannot be which side the breakout is going to occur after a tight market equilibrium. Nevertheless, there are two things we can do. First, we can adopt options strategy such as a straddle or strangle to capitalize on the breakout. In this case, we can profit when breakout on either side occurs. The drawback is that if the breakout is not significant or does not happen, we lose the premium from the options combinations.

Alternatively, we can wait until the breakout occurs and then jump aboard along if price breaks above the A Active Range and short if price breaches below it. To avoid being trapped in false breaks, we should wait until today Active Range or Modal Point also breaks above or below A Active Range before reacting.

Those familiar with Candlestick theory should realize that actually the circled bars together with bar A resemble a Harami pattern. However, their Candlestick counterparts do not constitute a Harami pattern (the Candlestick chart is not shown here, but please take my word for it). Only when their Candlestick bodies are replaced by Prosticks bodies (the Active Ranges) will the Harami pattern be conspicuous. Thus, the pattern can be called a Prosticks Harami instead.