Apple Daily --- 30 July, 2000

Buy on dip? Is one of the most widely used strategy in stock trading. Specifically, after confirming an uptrend, one should wait until a correction occurs and then buys when the correction is near the end.

However, life is not that easy. To buy at the low of a correction, one should (1) identify whether the current trend is really a temporary correction instead of the beginning of a bear trend, and (2) identify at which price the low of correction will occur.

Figure 1 shows the Prosticks chart of Pacific Century Cyberworks (1186). The powerful rally from A to B certainly confirms a determining uptrend. As such, investors using the buy on dip? Approach should wait for a correction to occur and buy on the low of the resulting correction.

From B to C, the market undergoes a correction phase after the powerful rally. How can we know that it is a correction but not a bear trend? Well, notice that from B to C, the market has fallen six days in a row. Even so, the market fails to fall below even the low of bar D, the last rising bar before the correction. This shows that the market tumble from B to C lacks strength, compared to the prior powerful rally. Thus, the tumble is a correction, not a bear trend. Notice also that on average, the Active Ranges of bars from B to C are shorter than those from A to B.

Okay, the next question is, how can we know that the correction stops at C? As explained above, since all the six falling bars from B to C are contained inside the single bar D, naturally, D?/B>s Modal Point, which is situated at the bottom of the bar, should provide support when price tests there. A correction phase usually lasts about three to six bars. Thus, at C, after falling six days in a row, and price is near the Modal Point of D, the correction is likely to end there.

Notice that coincidentally, the Modal Point of D lies on the same price level as the Modal Point of E and F, together forming a Modal Platform, providing a strong support to prices. A Modal Platform containing several points lying on the same price level means that a lot of buying forces had accumulated at that price and thus when the market falls to that level again, those buying forces resurface.

The low of an uptrend correction phase usually occurs at a previous major Modal Point or Modal Platform. Figure 2 shows the Prosticks chart of Hang Seng Bank. As can be seen, during the entire uptrend, intermediary corrections always stop at some significant historical Modal Points.

Of course, every bar has a Modal Point. Which Modal Points should we use in forecasting correction lows? Modal Points filtering is an art rather than exact science. One should rely on judgment, observation of past patterns, as well as other traditional technical tools to filter Modal Points which are significant from those which may merely be random noise. Using those filtered Modal Points as well as other technical tools such as RSI and Stochastics, one would then have a better idea where the correction low would occur. We have developed some effective techniques for Modal Points filtering. Interested readers please visit our website to learn more about it.