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ProSticks - Learning Curve
Hong Kong Economic Time --- June 8, 2000
Applications of Modal Point
The below chart shows the ProSticks chart of E-Kong (0524). After undergoing a
prolonged downtrend, the E-Kong appeared to have found a bottom at A.
Then, on 5/26, after falling to C, a strong rebound occurred which
propelled the stock upwards by 25% in less than a week.
It is still premature to conclude whether the bear trend is over. However,
the 25% rebound is indeed quite lucrative if one is able to catch it.
Looking at the ProSticks chart, one can observe that the low of C
(1.17) is in fact the same price as the Modal Points of A and B,
the two bars which mark the temporary bottom of the downtrend. It means that
after the price fell to A and B, a lot of buying pressure came into
play at the same price of 1.17 on both days. When price dropped to
1.17 once again at C, the previous buying pressure resurfaced and propelled the price
strongly upward.
Modal Points are the heaviest traded prices and thus they represent
important future support and resistance levels. They are price levels which
represent the tug-of-war between the bull and the bear. In most case, these
forces will exert a significant impact on future price movements of a particular
equity at similar price levels.
Without the benefit of the ProSticks chart and its Modal Point information,
investors may have used the low of A (1.10) as a benchmark for the support
level. As such, at C, investors may hesitate to go long until the price
reached 1.10, and thus, subsequently missed the rebound.
Market movements are supported and resisted by trade volume, not by the
price itself. Thus, the "true" support and resistance levels
should be identified by a price-volume distribution, rather than by the open, high,
low, and close prices alone. The advantage of the ProSticks chart is that it
provides information regarding the time-series, price-volume distribution in a single
chart.
At this point, the reader may wonder how one can distinguish which Modal Points are
significant and which are noise since every bar has a Modal Point. Refer again
to the below chart. As mentioned before, bar A and B are
important because they mark the temporary bottom of a prolonged downtrend.
Furthermore, since their Modal Points occur at nearly the same price level of
1.17, obviously, there is significant bargain-hunting going on.
More techniques on how to identify important Modal Points will be covered
later.
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