Hong Kong Economic Journal --- Aug 7, 2000

The figure shows the Prosticks chart of Australian dollar. Let us use it to perform a forecast of the currency.

First, take a look at the three bars at B. As can be seen, three days in a row at B, price cannot break below the Modal Point of A, which is the previous low. This shows that after a prolonged downtrend, bargain hunting started coming in. These buying forces were initiated at A. Apparently, they resurfaced at B.

Coincidentally, the lower Bollinger Band also occurs at the price level similar to the Modal Point of A. Bollinger Bands is a widely used technical tool in the United States and is gaining much popularity in Hong Kong recently. According to the theory, if the distance between the upper and lower bands (the bandwidth) starts widening and price closes above the upper band or below the lower Band and, a trend results. Otherwise, price oscillates between the upper and lower band.

Thus, we can see that at B, there are two layers of support for prices: The Modal Point of A, and the lower Bollinger Band, occurring at similar price level. The fact that three days in a row price cannot break through this support cause us to deduce that a bottom is forming at the support level.

It is very dangerous to try picking market tops and bottoms in tradings. Always trade in the direction of the trend. Remember the famous proverb which goes trend is your friend? Thus, even though we suspect the market bottoms out at B, unless we see an emerging uptrend, we should refrain ourselves to jump on board so quickly when the prevailing trend is still down.

So when should we go long? Trendlines can offer a clue.

Trendlines are a tool used to signify the change in direction of a trend. When the market rises above a resistance trendline, an uptrend is expected. Conversely, a downtrend results when a support trendline is broken from above.

Traditional trendlines are drawn using previous highs and lows. In our Prosticks chart, we draw the resistance trendline using the Modal Points of the previous highs and lows instead. Drawing trendlines using Modal Points make more sense because Modal Points represent the genuine market forces. Highs and lows represent only two trading instances of the whole day. Modal Points, on the other hand, is the price which all the market players have agreed to trade given all the economic and political conditions of the whole day.

As can be seen from the figure, a resistance line is drawn using the Modal Points of C and D. If price rises above this line, we can be confident that the market really bottoms out at B and an uptrend is confirmed. We will then long the currency. On the other hand, if the buying forces at B are weak and are only transitory, the market should not have enough strength to propel price upwards enough to break the resistance trendline. In this case, we would not have longed the market.