Apple Daily --- July 9, 2000

When the price falls to a support level, there are two things that can happen. The support level holds, causing the price to rebound or the support is broken, causing the price to drop until the next support is found. The question is, how can we forecast beforehand whether the support will hold or be breached?

One approach is to examine the momentum of the particular stock. When the price approaches a support level, the higher the momentum, the greater the likelihood that it will be broken, and vice versa. Traditional indicators such as the Relative Strength Index (RSI), Stochastics, Momentum, and Moving Average Convergence Divergence (MACD) can be used to measure market momentum. For example, suppose the price is falling but the RSI has a positive divergence or is in the oversold zone, the downward momentum is diminishing.

The strength of the support is another crucial factor. If the support is strong (e.g. a support level formed from a previous important low, a moving average, or a Modal Platform), chances are it will hold.

Thus, when the price approaches a weak support with a strong momentum, there is a high probability that the support will be breached. It is then not a good time to try to play the bounce off the support level. On the other hand, a weak market momentum combined with a strong support level foretells that the market is very likely to have found a near term bottom at the support level. Investors should be ready to go long.

The below ProSticks chart is of HSBC Holdings (0005). As can be seen, the price rebounded significantly off A. Notice that A coincides with a nearby Modal Platform connected with four Modal Points at around the price level of $86.25.

In retrospect, when the price fell to A, how could we have known beforehand that price would rebound significantly from there?

Using the above concepts, first, consider whether the market has enough momentum as it approaches A. As can be seen in the accompanied RSI plot, the RSI is already in the oversold zone, signifying that the market momentum is diminishing. Secondly, we need to consider the strength of the support level. Notice that the Modal Platform has four Modal Points passing through it, thus it is likely to be a strong support. Weak downward market momentum challenging a strong support, the consequence is obvious.

The ProSticks chart is invented to rectify deficiency of traditional Bar and Candlestick chart, but not to replace it. In fact, traditional technical tools such as RSI, Stochastics etc are extremely useful. If one can combine both ProSticks charting tools together with traditional technical tools, the effects will be astonishing. For example, in the above case study, we see that while ProSticks chart tells you that there is a strong support level $86.25, traditional tools tell you that the market is oversold there, signifying that the market is unlikely to penetrate the support level, at least on first attack.