Forum Archive Index - January 2002

["andrew cottingham" <arco@adinfinitum.co.nz>]

Trader 100,

Here is my reply to your questions.(Please also see attached WORD Doc).

What is the significance of the RH1 line?

The RH is my own term and stands for Resistance High. It is a minimalistic
idea based on the Darvas Box theory - usually without showing the box. A
Darvas Box is similar to the RED BOX I have shown on the ADV chart, and in
this case it can also be likened to a 'Rectangle Bottom', which is really a
period of consolidation.

This is how the RH works.

The highest high after the lowest low is the starting point. RH1 is
confirmed when it is followed by three days where the stocks highest price
is lower than or equal to the resistance high. When a following days price
closes above the RH it is considered a bullish move and signals a buy, (look
at the chart and see how on 29/10 it has broken out of the RED Consolidation
/ Darvas box / and RH line). What we are looking for in this case is the
message that the price has broken the resistance at RH1. Often, (but not
always), after a break out prices dip back and give us a chance to pick up
the stock at a slightly lower price. That is the significance of 'buy on the
3rd day' theory.  In certain circumstances I may buy on the first day after
the break of the RH, or even on the day of the breakout. There is no Holy
Grail because there are so many factors that may be taken into
consideration.

RH2 (shown on the attached chart) was formed on 31/10 and was broken on
15/11. This is again for me a bullish signal, and would lead me to consider
buying more shares (pyramiding).

ADV failed after RH3.

One may become interested in the ADV again in the near future if the price
closes above RH3. However if there is a decline over the next few
weeks/months then the whole process of trend reversal will apply again and
other patterns/indicators may signal renewed interest in the stock. For
example the stock may form a double bottom, which could be one of several
bullish indicators.

The RH/Darvas system is slightly more conservative than say buying
immediately after a trend line break, (MAGENTA ARROW) because one never
knows if the trend line break is a false break out, or if it is the real
thing and the bottom has been reached. Of course there are many other
factors that may point to the opinion that we are at the bottom. In that
case we may risk a proportion of our allotted sum by buying on the first day
after the break, and then buying the balance after the RH pattern in
complete.

Why did you buy 3 days after the break of RH1? Was the dragonfly doji your
signal?

Not at all, for me personally there were 6 plausible reasons to consider ADV
a buy at that point:

1. There was divergence between RSI / Macd and price trend.
2. The Macd had moved into positive territory (Blue Circle).
3. There was a close above the RH1 / Darvas Box / Rectangle Bottom.
4. RSI was looking very good
5. An old breakaway down trend line had been broken with a close above it on
higher than recent average volume.
6. On 29/9 there was a hammer followed by a spring, almost forming a tweezer
bottom (within 1 cent).

You will see on our exit, the reverse of 1,2 and 4 happened. There were
other elements, for example, a bearish engulfing pattern and a gravestone
doji prior to the break of the trendline.

NOTE. Dragonfly Doji's are doji's that opened at the high of a session, have
a considerable interperiod decline, then find support to rally back to close
at the same level as the open. Dragonfly Doji's are often seen after a
moderate decline, and are bottom reversal indicators especially when
confirmed with a bullish engulfing candle.


Do you ignore a buy signal from the MACD histogram (blue circle) unless the
stock has pierced a downward trend line?

No one signal can be taken in isolation. There must be confirmation from
other indicators, and these will vary from trader to trader, from stock to
stock, and from year to year.
The MACD Histogram (MACD H) is used to identify a breakout in price and
there is a high probability that the price will continue in the direction of
the breakout.  When using the MACD as a lagging indicator a buy signal is
generated when the histogram crosses above zero and a sell signal is issued
when the histogram crosses below zero.

You will find most traders develop their own systems over time based on
signals that work for them.
If you are interested in the Australian/NZ market I suggest you read books
by Darryl Guppy, Chris Tate and Louise Bedford. Based on their ideas, apply
and back test to develop a system that works for you, and remember no system
works 100% of the time. My final word of advice is that you must always have
a stop loss in place, and stick to it.

Please also remember these are only my ideas and opinions - other traders
may have varying opinions and see the whole scenario differently.


Andrew



----- Original Message -----
From: trader 100 <trader_100@hotmail.com>
To: <sharechat@sharechat.co.nz>
Sent: Tuesday, January 01, 2002 2:48 PM
Subject: [sharechat] ADV


> Andrew,
>
> Great ADV chart but I have some questions (please excuse my ignorance):
>
> What is the significance of the RH1 line?
>
> Why did you buy 3 days after the break of RH1? Was the dragonfly doji your
> signal?
>
> Do you ignore a buy signal from the MACD histogram (blue circle) unless
the
> stock has pierced a downward trend line?
>
> Regards,
>
> Trader_100
>
>
>
>
> _________________________________________________________________
> Chat with friends online, try MSN Messenger: http://messenger.msn.com
>
>
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ADV chart 31.12.doc

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