Apple Daily --- July 16, 2000

In an earlier article we explained how to draw support and resistance trendlines using Modal Points instead of the traditional highs and lows. We also illustrated how Modal trendlines sometimes provided an earlier trade entry point than traditional trendlines. Today, we will take one step further and explain how Modal Points can be used to prevent false trendline breakouts.

Figure 1 shows the Candlesticks chart of Pacific Cyberworks (1186). L1 is a supporting trendline drawn from the low of A and B based on the traditional approach. As can be seen, price broke the trendline at C, suggesting a bear trend is underway. However, after breaking the trendline, price immediately reversed its course and instead, rallied sharply over the next few days. The breaking of L1 at C was a technical trap. Those who sold short after L1 was breached had suffered tremendous loss.

Figure 2 shows the corresponding Prosticks chart of Pacific Cyberworks. L2 is the Modal supporting trendline drawn from the Modal Point of A and B instead of the lows. As can be seen, the low of C is exactly the same price as the Modal trendline L2. Thus, while the traditional support line L1 is breached at C, thereby signalling a downtrend, the corresponding Modal trendline L2 is still intact, signalling otherwise.

Therefore, if an investor looked only at the Candlestick chart and draws L1 as his trendline, he might have fallen into the technical trap. However, had he consulted the Prosticks chart at the same time, he would notice that the Modal trendline L2 is slightly below L1. Thus, he should have waited until L2 is broken before going short, especially L1 and L2 are close to each other. Subsequently, at C, when he observed that price attempted to break L2 but failed, he should be cautious.

Are there any ways we can forecast beforehand the market bottom at C? Well, we should have due to the following reasons:

1. As explained before, at C, price temporarily touched L2 but closed back firmly above.

2. Coincidentally, the low at C lies on a previous Modal Platform which consists of 4 Modal Points. A Modal Platform which consists of more than 2 Modal Points can be regarded as a very strong support. Thus, at C, we have two layers of support : the Modal trendline and the Modal Platform.

3. RSI and Stochastics (not shown) are deeply oversold.

Thus, as explained in last week, a weak falling momentum meeting a strong support, a rebound should have been expected.

Traditional trendlines are notorious for their false breakouts. Since trendlines have been around for many decades and everybody draws the same trendlines, traditional trendlines are subject to manipulation by big money players. For example, big money players may wait until a resistance line is broken before they start distributing or until a support line is breached before they start accumulating. Thus, investors should watch out for the bait of these big money players.