Forum Archive Index - May 2002

[Phaedrus <Phaedrus@techemail.com>]

 Nick states "The wedge in this case has been caused not by normal stock action 
but by 50 million new shares entering circulation" This IS normal stock action. 
He might just as pointlessly state "The wedge in this case has been caused not 
by normal stock action but by a reaction to the recent mine accident" (or 
lowered profit forecast, terrorist attack, etc) Nick, you seem to think that 
price falls and their associated chart patterns somehow don't count if they are 
associated with known events. Not so - they do count. See, what IS important is 
the NATURE of the downtrend we are looking at - regardless of its cause, known 
or unknown. Is volatility increasing or decreasing? Is volume increasing or 
decreasing? Is this downtrend gaining or losing momentum? Is the underlying 
primary uptrend still intact?

 Suppose every recipient of these new shares resolved to hold onto them, the 
price would not have fallen at all. Suppose every recipient of these new shares 
thought that AUO was a weak stock, and resolved to sell, to quit at a profit 
while they still could. This would lead to an escalating fall in price, 
probably to quite low levels. The markets reaction to this (known) event gives 
us a very clear indication as to market sentiment regarding AUO. What has 
happened? Prices have fallen, but on falling volatility. What does this tell 
us? That, whatever the cause of the current secondary downtrend, it is likely 
to be of limited range and duration.

 Gerry, you say "Nice to see that the uptake was excellent so far - this stock 
seems to have some strength." I say "This stock is in a secondary downtrend, 
but the falling prices are associated with falling volatility. Trends with 
these characteristics are almost invariably followed by a reversal, and 
continuation of the Primary uptrend."  Don't you see that we are both saying 
the same thing? We are simply speaking different languages. The only difference 
is that you are focussing on AUO, while I am focussing on market sentiment 
toward AUO.

 A central tenet of Dow Theory is that the price discounts everything. All 
information, the sum total of all opinion, fact, rumour, knowledge, news and 
fundamentals is reflected in the price. The current chart formation is the 
markets reaction to an event that happens to be common knowledge. It gives us 
important information as to how the market perceives AUO.

 The bottom line:- In a stock in a strong primary uptrend, a Falling Wedge 
formation provides an excellent low risk entry opportunity REGARDLESS OF THE 
UNDERLYING CAUSE OF THE FORMATION.

               Phaedrus.

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