Hong Kong Economic Journal --- 6 Nov, 2000

The reason why we study charts is because charts reflect all the economic and political factors. Some traders claim that they do not need to listen to news or commentary. The charts already tell them what is happening in the economy. This saying may be a bit extreme. However, chart movements, especially volume distributions, do reflect the market demand/supply equation and this equation is determined by fundamental factors.

Consider our concept of Active Range. The Active Range comprises 68% of volume traded during the day. The market has consolidated around this range throughout the trading session. It is thus the range which market participants in aggregate have agreed to trade on given all the available economic and political conditions. In other words, it is the fair value of the market.

As such, in the following day, if the market fundamentals do not change significantly, price should continue to trade inside the previous day's Active Range. However, if the Active Range of the following day increases or decreases, then we should know that the fundamentals forces have shifted either positively or negatively, even though we had not listened to the news.

Sometimes we can detect this shift in market fundamentals right from the opening price. Consider a bear market. Everyone expects the market to fall. However, unexpectly, it opens bullishly above the previous day's Active Range. Other things being equal, something may have happened in the economy which cause buyers to enter the market desperately and bid above the Active Range, right from the market open. The bears have to be cautious.

The figure shows the Prosticks chart of Amgen. Amgen is one of the largest biotechnology company in the United States. It is one of the constituent of Nasdaq-100 Index. Besides, it is also listed in Hong Kong Stock Exchange under the stock code 4332.

As can be seen from the figure, bar A is a very bearish bar. It is a long falling bar. Both Active Range and Modal Point are concentrated in the lower part of the bar range, indicating that most trades were transacted at low prices. The market also closed inside the Active Range, signifying bearishness. Under these gloomy market conditions, naturally, the market should open inside the Active Range the next day at B, if not below.

However, unexpectedly, the market opened above the Active Range the following day. This signified that some desperate buying forces had entered the market. Some changes had taken place in the underlying fundamental factors which most traders had not been aware of. As can be seen, after opening above A's Active Range, the market sank to retest A's Active Range momentarily. However, once price touched the Active Range, buying orders emerged again and propelled price upwards. Eventually the market closed near day high. The Modal Point is near day high also. For the following two days, the market continued to rise.

In short, one should examine the relationship and relative placement among open price, close price, and the Active Range. Remember, the Active Range is the market value. If price "unexpectedly" opens or closes outside this value, it means some fundamentals may have changed, at least in the short term.