Apple Daily --- 25 June, 2000

Avoiding Technical Traps Using Active Range

Every investor appreciates the importance of volume. Volume measures the strength of the market. If the market rises but the rise is not accompanied by volume, the market lacks strength and the rally may not be sustainable in the near future.

The advantage of the ProSticks Charting System is that it incorporates volume information on the price-time dimension. The Active Range, which is the body of the ProSticks bar, indicates the range where nearly 70% of the total volume had transacted.

The first figure shows three scenarios of a ProSticks bar. In 1(a), the Active Range is located on the lower half of the bar, while in Figure 1(b), the Active Range is situated on the upper half. Thus, we know that for the former, most of the volume was concentrated in the higher prices while in the latter, most transactions occurred at the lower prices.

In 1(c), the Active Range is symmetrical which indicates that the volume was evenly distributed along the day range. For a strong rallying day, a symmetrical Active Range indicates that buying orders flow into the market continuously throughout the day as the market keeps on rallying higher and higher.

As such, the Active Range can be used to detect potential technical traps

Consider the below ProSticks chart of Culturecom Holdings (0343). Notice that bar A is a very long bar which closed near the day high. Furthermore, it closed above the moving averages and exceeded all the highs of nearby bars. Thus, bar A is very bullish, if we only consider the information offered by the traditional Bar and Candlesticks charts. Unfortunately, for the following few days, the market lacked a follow through and the market fell back below the moving averages. Bar A is what we call a technical trap.

Now consider the Active Range of A. Notice that though the price rallied and closed strong, the Active Range was situated in the lower half of the bar range and well below the 40-Day moving average. The late rally is thus suspicious and was not accompanied by volume. In short, the divergence between volume and price shows that the market lacked strength for this particular day.

It is still premature to conclude whether the stock will assume a downtrend. However, had investors consulted the ProSticks chart and noticed the divergence between the Active Range and the price, they would have hesitated before longing the stock at A, despite its apparent bullishness during that day.

Those familiar with the Market Profile theory by J.Peter Steidlmayer will realize that the Active Range is actually the value area in the profile diagram.