By Sylvain Vervoort – With this article I will introduce you to the practical use of windows or also called gaps in price charts.
An up window in a bar chart appears when the low price of the current bar is higher than the high price of the previous bar. A down window in a bar chart appears when the high price of the current bar is lower than the low price of the previous bar.
As long as a window is not closed, the whole area of a window represents support or resistance for future price moves. In a down-window the whole area of the window represents resistance. This window is closed and consequently resistance has no further meaning when price turns up and completely covers the window. The resistance is only broken when it is penetrated with a closing price. The size of the window has no importance.
With an up-window the whole area of the window represents support. This window is closed and consequently support has no further meaning when price turns down and completely covers the window. The support is only broken when it is penetrated with a closing price. Again the size of the window has no importance.
I will talk about four window types: the common window, the breakaway window, the continuation window, and the exhaustion window. A breakaway window, a continuation window, and an exhaustion window represent a much more important support or resistance compared to the common window. Windows are part of support and resistance in a chart and can be used for initial stops because of their support as well as for price targets because of their resistance. According to the type of window we can expect to be at a trend reversal, a trend continuation or near a trend conclusion.
A common window is so-called because it is common in the normal price evolution. Most of the common windows can be found during periods of price consolidation when the price is moving sideways. A common window does not give any indication about an expected price move. Generally, it only can be used as a support and resistance level for the short term. On a daily chart, common windows will be closed most of the time within a couple of weeks.
A breakaway window will appear with a change in the medium or longer-term price trend. A rising breakaway window appears at the start of a new uptrend. About three-quarters of the rising breakaway windows on a daily chart are only closed after one year. Only about 2% will be closed within a week. Usually the breakaway window is created with high volume or a gradually higher volume a number of bars before the breakaway.
About 60% of the falling breakaway windows on a daily chart are also closed within a year and only about 2% will be closed within a week. The breakaway window is created with high volume or gradually higher volume some bars before the breakaway.
A continuation window can be found about halfway through a running trend, often after a short consolidation pattern like a flag or a pennant, or a bigger correction pattern like a triangle or a rectangle. Almost all of the rising continuation windows on a daily chart are closed within a year. Just about 5% will be closed within a week. The continuation window is normally created with high volume or a higher volume a number of bars before the continuation window.
Almost 100% of the falling continuation windows on a daily chart are also closed within a year and about 5% will be closed within a week. The continuation window is created with high volume or a gradually higher volume a few bars before the falling continuation window.
The exhaustion window is found near the end of the running trend. Often, you will see a bigger window with highly volatile price moves. Almost all of the rising exhaustion windows on a daily chart are closed within a year. As many as half of them or 50% will be closed within a week. The exhaustion window usually is created with high volume or higher volume a number of bars before the exhaustion window.
Almost all of the falling exhaustion windows on a daily chart are closed within a year. As many as half of them will be closed within a week. Usually, the falling exhaustion window is created with high volume or a gradually higher volume a number of bars before the falling exhaustion window.
As we have seen already, an uptrend or a downtrend with a breakaway, continuation and exhaustion window is mostly created with high volume or a gradually higher volume a number of bars before these windows. Also you will notice many times price chart patterns before these windows. Windows are therefore most usefull as a confirmation pattern indicating the start of a new trend, the continuation of a trend or the end of a trend.
About the Author
Want to learn more and see some examples about stock chart window support and resistance? You can find learning material on basic technical analysis techniques for free at my website: http://stocata.org. Sylvain Vervoort is a trader and author with contributions to Stocks & Commodities Magazine.