Hong Kong Economic Time --- June 15, 2000

Trendlines are widely used by technical analysis followers. Thus, when a resistance trendline is broken, one should go long. On the other hand, when a supporting trendline is breached, one should go short.

Traditional trendlines are formed by connecting two distinct highs (for resistance) or lows (for support) together. However, as one may guess, Modal Points may also be used for drawing trendlines.

The above chart shows a Modal Line chart for SHK Properties (016). Unlike the traditional line chart, the Modal Line chart connects Modal Points together instead of the closing prices as in a Line chart. As can be seen, a resistance line L1 is drawn using Modal Points A and B. The price surged after the L1 resistance line was broken, showing that the Modal trendline is quite effective.

Now consider the above chart which shows the ProSticks chart of the same stock. L2 is the traditional resistance trendline that connects the highs of points A and B. The Modal trendline L1, as drawn earlier, is also included for comparison. The following can be seen:

1. If your strategy is to go long after the resistance trendline is broken, the Modal trendline will result in a more optimal entry point. L2 was broken at roughly 53.85 while L1 was breached at around 50.75, a whopping 3 point difference.
2. Second, the price did not break L2 from below. In fact, for the day that the trendline was broken, the price gapped up above L2 at the open and never retraced back. Thus, those who anticipated on longing at the breaking point of L2 were unable to have their orders filled unless they were willing to buy at a much higher price.

In general, using Modal Points to draw trendlines will result in more optimal entry points than using traditional trendlines drawn from the highs and lows. Furthermore, since most investors use the highs and lows to draw trendlines, they are more susceptible to false breaks as well as bad fill orders. Modal Points are the heaviest traded price. Using it to forecast future support and resistance levels by means of linear interpolation in the form of a trendline is, in fact, theoretically sound.