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ProSticks - Learning Curve
Hong Kong Economic Time --- June 16, 2000
Avoiding Technical Traps Using ProSticks
Dark cloud over is a very popular reversal pattern for Candlesticks theorists.
Specifically, it is formed when the price gapped up at the open but then closed near
the day low. When this occurs during a prevailing uptrend, it is a signal that a market top is
imminent.
The above chart shows the Candlesticks chart for Cheung Kong (0001). The Bar on the left of A has a
dark cloud over pattern according to the Candlesticks theory. The Price gapped up significantly at
the open but then fell all the way back to the previous day's price range and closed near
its low, signifying a very bearish pattern. However, contrary to what the theory forecasts,
the price did not continue to fall the following days. Instead, it went into a
consolidation.
The next chart (above) shows the corresponding ProSticks chart. Notice that even though the
Candlesticks chart exhibited a bearish dark cloud over pattern, the bar displayed
by the ProSticks chart is not as bearish for the following reasons:
- The Modal Point and Active Range is concentrated in the middle of the price range.
- The Active Range is narrow and occupies a small portion of the day range. This
means that the selling pressure was only concentrated in a narrow region
instead of being evenly distributed along the bar range. Thus, the drop may have been
due to market overreaction and occurred during the end of the day.
As such, in this case, the ProSticks chart can help investors avoid a "Technical
trap" as exhibited in the Candlesticks chart.
Candlesticks patterns tend to have technical traps because the chart
considers only individual prices (namely, the open, high, low, and close).
Individual prices can be deceptive since it can be subject to manipulation or
market overreaction. Active Ranges and Modal Points, on the other hand, cannot
be manipulated. It represents the price levels with substantial traded volume and
thus will be very expensive for big money players to manipulate.
In short, Active Ranges and Modal Points can provide clues into the intrinsic market
forces and thus, provide a genuine picture of the underlying strength and
structure of the market.
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