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Prosticks Articles
Hong Kong Economic Journal --- Nov 27, 2000
Modal Point RSI Alert
Traditional technical indicators such as RSI,
Stochastics and Moving Average are calculated using
closing prices. As we have said many times before, closing
prices may not be the most representative price of the
daily market activities. They are subject to manipulation,
market over-reaction, or even wrong input by the
particular software you are using. To summarize the
overall market activities throughout the day, the Modal
Point is a better choice, because it is the price which is
backed by volume.
Thus, we can use the Modal Points to recalculate all
the traditional technical indicators. The results may be
enlightening.
Figure 1 shows the Prosticks chart of the PALM pilot.
Everybody knows that PALM is the most favorite handheld
computer around the world. Accompanied the chart the RSI
plot is shown. However, the RSI is calculated using Modal
Points instead of the traditional closing prices.
As can be seen, at A, price made a new high
compared to B. However, the RSI plot at A failed
to make a new high. This is a divergence situation.
According to the theory, when divergence occurs, the
market is topping. As can be seen, price subsequently
underwent a severe correction.
Figure 2 shows the same chart of PALM. However, this
time, the RSI is calculated using the traditional closing
prices. As can be seen the divergence situation at A
is absent. Thus, while the RSI using Modal Points suggests
that the market is topping at A, traditional RSI
using closing prices fail to signal it.
In the Prosticks official website, users can choose to
calculate various indicators using either the closing
prices or the Modal Points. Users are encouraged to
explore themselves the difference of the indicators
calculated by both approaches.
One more thing about the PALM chart. Notice that bar A
is a very long bar with the closing price near the day
high. Thus bar A is a very bullish bar according to
Candlestick theory. However, the Prosticks bar of A
is not very bullish. The Active Range is concentrated in
the bottom part of the day range, meaning that though
price closed strong, the rally is not accompanied by
volume. The rally is suspicious.
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