Thursday, May 29, 2008

Narrow Range Days

Markets go through cycles of expansion and contraction. This concept is applicable to all time frames. An intra day trader will find periods of small movements within a trading day are followed by bursts of price moving in one direction or the other. A Swing trader can locate days when prices move in a narrow range - these are periods of contraction, followed often by an expansion in price ranges, generally in one direction.
It is useful to track stocks where prices are moving in a narrow range - contraction. Our interest is in what may happen once the contraction is over. A sharp move in prices - expansion - can be expected. NR7 days are one such pattern of narrow range. This is a day when the price range is the narrowest in the last seven days - bulls and bears are equally balanced. One of them is going to get an upper hand, leading to expansion in any one direction. Here is a chart for Jindal Saw where an NR7 was followed by a small up move in price. The up move was enough for a swing trader. It is possible that there may be more upside to come.