Hong Kong Economic Journal --- 14 August, 2000

After a breathless rally from 104 to 110 in July, the Dollar Yen finally enters a correction phase and the currency falls as low as 107.5 as of this writing.

Figure 1 shows the Candlestick chart of the Dollar Yen. Note that the rally starting in mid of June goes as far as A (109.87) before the correction occurs. As can be seen, the point A is near the previous major top occurred at B (110.13), showing that the previous top once again exerts resistance to price movements at A, halting the rally.

However, on careful examination, one can see that A does not occur at exact price level as B, but instead, a bit lower. Consider a trader who happens to long the dollar at low price levels. Since B is the previous important top, he may expect the rally to be able to reach B before receiving selling pressure. However, as can be seen, A barely misses the B target and thus the trader cannot but gives back much of his floating gain during the correction phase.

As said before, due to various factors including market overreaction, unexpected money flow, and the random factor, individual prices traded in the market are unreliable. Thus, using them to identify market levels for stoploss and profit-taking are unreliable too.

Modal Points, on the other hand, are more reliable. They are not formed by one single trade, but the bulk of trades taken place throughout the day.

Figure 2 shows the Modal line chart of Dollar Yen. To recap, the Modal line chart connects all the Modal Points together and provides a bird eyeview for all Modal Points distribution in the chart. As can be seen in the Figure, the Modal Points for the two bars around A actually have exactly the same price levels as the Modal Points of the previous top clustered at B.

Hence, while the Candlestick chart reveals that the top at A barely misses the top of B, in the Prosticks chart, the two tops are actually identical, from a Modal Point perspective.

Thus, when the investor observes the alignment of all the Modal Points at A with B, together with the fact that the RSI is already oversold at A and starts falling, he will not wait for the market to actually top B before getting out of the market, but instead exit the market as soon as the double Modal Top? pattern occurs.

The figure also offers clues for identifying the near-term support levels of the Dollar Yen, as marked by L1, L2, and L3, based on Modal Points distributions. Please be reminded that support levels work in a two-way streets. When price attempts to break them but fails, rebound occurs. On the other hand, if price breaks below the supports, the market is expected to continue falling until the next support is attained.