Q: Arthur, the terms "reaction lows" and "reaction highs" are frequently used by you, but I haven't been able to find them defined. Specifically, I would like to know how to differentiate between an ordinary high (or low) and a "reaction high" (or reaction low), and how to pick them out on a stock chart when attempting to draw a trendline.

A: Reaction highs are minor highs that form within the larger trend. Reaction lows are minor lows in the same capacity. Sometimes these lows or highs can be connected to form a trendline. Other times, they will not match up perfectly.

Support levels (lows) and resistance levels (highs) are sometimes determined by 1 or more reaction lows or highs. Deciding on the importance of each reaction high or low depends on the amount of time spent at that level. For instance, the Dow spent 5 days in early June and 6 days in July at 10,850, indicating that these reaction highs marked an important resistance level. Whereas the 25-Apr reaction high at 11,137 and the 17-May reaction high both formed with just two trading days. While they are legitimate reaction highs, the validity of these as resistance levels may be questionable. You can also see that the reaction lows around 10,350 in May and June formed over a number of trading days, increasing the validity of this support level.

Cheers
Arthur Hill

Q: How do I make sense out of the sector rotation chart? It seems to have a lot of information in it. Can the blue portion move to left or right, or does it always move in one direction? Also, as the blue portion moves, does this suggest modification of portfolio to those sectors indicated in the top portion of the chart? To create the chart, are leading or following indicators used? this is a really interesting feature for those who engage in long term investing. Is there an Education Center article on this topic?

A: No, there isn't and that's my fault. I've been meaning to write it but other things have prevented me so far. Here's a quick tour of our Sector Analysis page to tide things over until I get some free time (ha!).

In the middle of the page (below the PerfChart) is our Sector Rotation Model. The blue box on that chart is my opinion on where things are right now in the economic cycle based on how the market sectors (the SPDRs) have been performing recently.

To see what I look at when I determine where to position that box:

1. Scroll back up to the PerfChart that's above the Sector Rotation Model
2. By default, that PerfChart should be in Histogram mode (one vertical bar per sector). If you want, you can use the buttons in the lower left corner to toggle between Histogram mode and Line Graph mode. When you are done, put the chart back into Histogram mode.
3. Now click on the center of the slider at the bottom of the page and move it back and forth.

Or -- Right-click anywhere on the chart and select "Animate" from the popup menu that appears and you'll really see a show!

As the slider moves, watch for the various sectors to strengthen and weaken and you'll see a rough approximation of the sector rotation pattern on the Model chart. Try using other durations instead of 65 to see different results.

I wrote a much more detailed description of this process in the 12 August 2000 edition of Chart Watchers Weekly.

Chip Anderson