Forum Archive Index - May 2002

["nick" <helmett@xtra.co.nz>]

   We will have to agree to disagree on this one. In my view the market
being flooded with cheap shares has inevitably lead to  the price falling.
            When GPG has its 10% sharesplit the day after the stock will
probably fall around 10%  Now, if that happened to take the stock below a
trendline would you sell?   Clearly the stock would be doing just as well as
the day before yet you would attribute the new shares as normal action and
ignore the reasons for the 10% drop?
           Nick

> 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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