Apple Daily --- 3 Sept, 2000

Today we will apply Prosticks concepts to analyze the behaviour of the Hang Seng Index.

Notice that the Hang Seng Index is not a traded instrument. Thus, it contains no volume information. Therefore, in order to calculate its Modal Point and Active Range, we use a time approach. In the time approach, instead of identifying which price contains the highest volume traded at it, we identify the price which the market spends the most time on. Specifically, the computer will keep track of all the tick prices the Hang Seng Index has updated on the quote screen. The Modal Point is the price which has the highest updating frequency. Similarly, the Active Range is the price range which the index has fluctuated most of the time throughout the day. This time approach to keep track of trading activities for indices and futures is originated from Market Profile theory and has been widely adopted by institutional traders and big money guys.

The time approach can be applied to stocks in the same way. There are several advantages of using the time approach to calculate Modal Points instead of the volume approach. First, as said before, indices and currencies have no volume information. The time approach is the only option. Secondly, sometimes volume information can be misleading, especially for block transactions which bypassed the brokers? queue. Should such volume be counted towards Modal Point computation? Thirdly, think about this. Suppose a stock opens gap down at $100 and then a huge volume (let say 1 million shares) changes hand immediately at $100 within 2 minutes, much of which are overnight stop-loss trades. Then suddenly the stock rallies all the way to $110 and most of the time in the remaining session it trades in a narrow range at $110 with a total volume of $0.8 million. In this case, we would agree that though more volume is traded at $100, $110 is the true Modal Point. The market spends only two minutes at $100 but nearly the whole day at $110. $110 is a more important price level. Those volume traded at $100 are only overnight stop-loss orders which are less significant.

Our research does indicates that Modal Points computed using the time approach have more predictive power than the volume approach. In the Prosticks official website, Modal Points offered by both approaches are displayed.

Figure 1 shows the Prosticks chart of the Hang Seng Index generated using the time approach. As can be seen, during August, the index has been consolidated in the 16800-17800 range. A, B, C, D and E are the high points of the consolidation. Coincidentally, they have near exact price levels as the Modal Point F and G, meaning that whenever price attained around 17800 level, selling pressure came out and these selling pressure were originated from the Modal Point of F and G. Notice that after price forms the new high at H, F is the first bar which starts the correction. As such, after forming a new high, severe selling pressure from big money guys rushed into the market, particularly at the Modal Point of F. Obviously, these selling pressure resurfaced whenever price rose back to its price level.

Suppose we are back to day E. Are there anyway we could forecast during that day that the market is going to be resisted by the Modal Platform of F and G when price initially rose to there? Take a look at Figure 2 which shows the Stochastics plot in accompany of the Prosticks chart. Notice that at E, though the price has been rising in the previous few days, the Stochastics is in already overbought region and has already started to fall, with the fast line below the slow line. This shows that the market lacks upward momentum. When the market lacks momentum, it is likely to be resisted by the Modal Platform instead of penetrating through it.