unprofitable for him. The out-and-out boardroom gamblers (EN: day traders rushing to and fro
probably exacerbates daily volatility) still come in, although high margins have cramped them
too. In recent years, they have appeared in numbers only in the final stages of Bull Markets.
(EN: Note the day-trading craze that infected the markets in the late 1990s.) Their operations never
did affect the charts much except to augment activity.
On the other hand, higher taxes and greater regulation have most certainly not
provided safer, closer, or more stable markets for the small investor. Higher margins have
not prevented Panic Collapses. If anything, markets have been “thinner” on the downside,
more vulnerable to rapid and drastic decline than they were before modern regulation. We
still have the very same sort of Bull and Bear Markets, and much the same sort of market
trend development as 50 years ago. The surprising thing is not that a few types of chart
patterns that were, on occasion, produced by unregulated trading are now less common,
but rather that the great majority of technical phenomena have been practically unaffected.
The chart student of 1907 would be quite at home with the charts of 1966. (EN: And with those
169Chapter eleven: Consoli dation Formations
of 2000. That is why so little change has been necessary to bring Edwards’ classic account current to
the third millennium. EN9: A note to a note. Pools and manipulators disappear and are replaced by
some new pernicious form of skullduggery. Specialists and market makers are hauled before the bar of
justice for cheating. In the twenty-first century, hedge funds proliferate like rabbits in Australia. For
any exacerbation of volatility they cause, they probably make up for in additional market liquidity.
The same patterns keep appearing because, computers to the contrary notwithstanding, humans are
eventually responsible for pulling the trigger. It does seem that frequently patterns are not so neat as
they were “in the old days.” Trendlines, especially horizontal lines, seem to be more “zones” than hard
and fast lines and more judgment might be necessary in interpretation. But everything that Edwards
says here might have been written in 2005 instead of in the mid-twentieth century.)

171
chapter twelve
Gaps
A gap, in the language of the chart technician, represents a price range at which (at the time
it occurred) no shares changed hands. This is a useful concept to keep in mind because it
helps to explain some of their technical consequences, which are illustrated in Figures 12.1
through 12.13.
Gaps on daily charts are produced when the lowest price at which a certain stock
is traded on any one day is higher than the highest price at which it was traded on the
preceding day. When the ranges of any two such days are plotted, they will not overlap or
touch the same horizontal level on the chart; there will be a price gap between them. For a
gap to develop on a weekly chart, it is necessary for the lowest price recorded at any time
in one week be higher than the highest recorded during any day of the preceding week.
This can and does happen, of course, but for obvious reasons not as often as daily gaps.
Monthly chart gaps are rare in actively traded issues; their occurrence is confined almost
entirely to those few instances in which a Panic Decline commences just before the end of
a month and continues through the first part of the succeeding month.
Which gaps are significant?
From the earliest days of stock charting, gaps attracted attention. These “holes” in the price
trend graph were conspicuous. It was only natural that observers should attach importance
to them and should try to assign some special significance to their occurrence. But the result
was unfortunate, for there soon accumulated a welter of “rules” for their interpretation,
some of which have acquired an almost religious force and are cited by the superficial chart
reader with little understanding as to why they work when they work (and, as is always the
case with any superstition, an utter disregard of those instances where they do not work).
We refer to this situation as unfortunate not so much because the gap “rules” are wrong,
but rather because their blind acceptance has barred the way to a real understanding of
a gap’s implications and the establishment of a more logical basis for its uses in trading.
The most common superstition is that “a gap must be closed.” Sometimes it is stated
more cautiously in such words as follows: “If a gap is not closed in three days, it will be
closed in three weeks, and if it is not closed in three weeks, it will be closed in three months,
etc.” There are numerous variations, but they all add up to the belief that a gap must be
closed and the trend is not to be trusted until the gap has been covered. It is the latter
inference that leads to error.
Closing the gap
But first, what is meant by “closing” or “covering” a gap? Suppose a stock in an Advancing
Trend moves up day after day, from 20 to 21, 22, 23, 24, and closes one night at the top of its
range for that day, at 25. The next morning it opens at 26 and keeps right on moving up from
there. This action leaves a 1-point gap, between 25 and 26, on the chart. Then suppose the
rise continues to 28, halts there and is followed by a reaction in the course of which prices
172 Technical Analysis of Stock Trends
slip to 28, and then halts there and is followed by a reaction in the course of which prices
slip back to 27 , 26, and finally to 25. The return move has carried prices back through the
gap area (25–26); the gap has thereby been covered or closed. In brief, a gap is closed when
a subsequent price trend comes back and retraces the range of the gap.
Must a gap be closed before prices move very far away from it? Certainly not. Will
it be closed eventually? Probably, yes. If it is not closed by the next Minor Reaction,
there is a


he return move has carried prices back through the
gap area (25–26); the gap has thereby been covered or closed. In brief, a gap is closed when
a subsequent price trend comes back and retraces the range of the gap.
Must a gap be closed before prices move very far away from it? Certainly not. Will
it be closed eventually? Probably, yes. If it is not closed by the next Minor Reaction,
there is a chance it will be covered by the next Intermediate Retracement, and if not
then, pretty surely by the next great Major Swing in the opposite trend. But that may be
years later—hardly a matter of interest to the ordinary trader. The investor who bought
Chesapeake and Ohio shares at 260 on October 21, 1929, counting on the closing of the
gap which that issue had made on the preceding Friday, 2 points down from 266 to 264,
had to wait nearly seven years to get out even. Not until it neared the Top of the next
Major Bull Market did CO attain an equivalent market value (65, since it was split 4-for-1
in 1930). In the meantime, he saw his investment shrink in 1932 to less than a sixth of his
purchase price. As a matter of fact, there were hundreds of gaps made in the charts of
the 1929–1930 markets that never have been covered since then, and many of them, it is
safe to say, never will be closed.
If you will think the matter over for a moment, you will see that the probabilities we
have stated above for a gap’s being closed apply just as well to a stock’s returning to any
price range at which it has once been traded, gap or no gap.
AMERICAN WATER WORKS & ELECTRIC AW
1945
G
G
JANUARYF EBRUARYM ARCH APRILM AY JUNE
16
15
14
13
12
11
10
9
Sales
100’s
250
200
150
100
50
6 13 20 27 3 10 17 24 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30
Figure 12.1 The April–June Rectangle on this 1945 chart of “ AW” contained a number of insignificant
Pattern Gaps. The two larger gaps marked “G” are of the Continuation or Runaway class. Note that
prices closed at or near the top on each day that made a gap; neither of these was closed for two years.
173Chapter twelve: Gaps
Another point: there are thousands of price gaps made in trading—some of them quite
wide—that do not appear at all on the standard daily range charts because they are made
during a single day and not between one day’s closing and the next day’s opening. Such
intraday gaps are ordinarily overlooked entirely; the gap theorists are oblivious of them,
although their significance is often greater than that of many interday gaps. Practically
every emphatic breakout move from a strictly defined Rectangle or Right-Angle Triangle is
attended by a gap, but only those few show up on the charts that occur at the day’s opening
gong.
If we seem to have “protested too much” in the foregoing, it is only because we want
our readers to study this topic with an open mind, free from preconceived notions as to
any mystic qualities that gaps may possess. Turning to the other side of the picture, some
gaps have technical import. Some gaps are useful to the chart analyst in appraising trend
possibilities. Let us see what we can make of them.
BETHLEHEM STEEL BS
1937
APRIL MAY JUNE JULY AUGUST SEPTEMBER
G
G
G
G
120
112
104
96
88
80
76
72
68
64
60
56
Sales
100’s
250
200
150
100
50
G
3 10 17 24 1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 4 11 18 25
Figure 12.2 The large up-gap made on July 5 in this chart was a typical Breakaway Gap, occurring
as prices broke out of the complex base for the July–August Secondary Recovery. (Compare this
chart with Figure 7 .14.) Another type of Breakaway Gap—through a trendline—occurred on
August 26. That of September 7 was primarily due to the “ex-dividend,” whereas that of September
18 was still another type of breakaway—through a Support Level. The first gap marked, on April
26, must be classified as a Runaway; it made a sort of an “Island” of the whole April–June complex
base.
174 Technical Analysis of Stock Trends
Ex-dividend gaps
First, however, we must eliminate from consideration the gaps that do not mean anything.
An eighth-point gap obviously has no technical significance as it represents only the
minimum permitted change in price. By the same token, a gap of a quarter of a point
or even a half point in a high-priced stock, such as Norfolk & Western (before the split),
represents only a normal, in fact tight, spread between successive bids. In brief, to carry
interest for the chart technician, a gap must be wider than the usual changes in price that
occur under normal or prevailing trading conditions. A second class of gaps that have no
forecasting implications are those formed consistently and habitually by “thin” issues in
ZENITH RADIOZ E1 941–1943
S S
H
G
26
24
22
20
19
18
17
16
15
14
13
12
11
10
9
8
Sales
100’s
500
400
300
200
100
ND JF SO ND JF MMM AJ JAO S
Figure 12.3 A potent Breakaway Gap that showed on Zenith’s weekly chart when it broke out of a
Head-and-Shoulders Bottom in early 1942. Note high volume developed beyond the gap, suggesting
it would not be quickly closed. The April reaction stopped short of it. In fact, this gap still had not
been closed in 1956, more than 14 years later.
175Chapter twelve: Gaps
the medium- and high-price brackets. You can spot them easily; if your chart of a certain
issue shows numerous gaps as a regular thing, then no one of them is apt to mean anything
special.
Finally, gaps that appear on the charts when a stock goes ex-dividend (whether the
dividend be in cash, stock, rights, or warrants) possess no trend implications. They are
occasioned not by a change in the Supply–Demand relation that governs the trend, but
rather by a sudden and irreversible alteration in the actual book value of the issue.
Also of interest in this chart is the Descending Triangle, which started to form in March,
but it was never completed—a deceptive and discouraging picture until the April 7 gap was
made.
The Flag of mid-April “measured” t

eBooks\Technical Analysis of Stock Trends 11thed\original\Technical Analysis of Stock Trends.pdf


are
occasioned not by a change in the Supply–Demand relation that governs the trend, but
rather by a sudden and irreversible alteration in the actual book value of the issue.
Also of interest in this chart is the Descending Triangle, which started to form in March,
but it was never completed—a deceptive and discouraging picture until the April 7 gap was
made.
The Flag of mid-April “measured” the move from 9 1/2 to 14. The gaps measured the
two halves of it, on either side of the Flag.
Eliminating the technically meaningless types named above, we are left with the gaps
that occur infrequently (and that are not occasioned by an ex-dividend change in value)
in issues that are so closely and actively traded as ordinarily to produce “solid” charts.
A 1-point gap, for example, in the chart of New York Central would be an unusual event; it
would demand attention and presumably have some forecasting significance.
Such gaps, for the purposes of our study, may be divided into four classes: Common or
Area Gaps, Breakout Gaps, Continuation or Runaway Gaps, and Exhaustion Gaps.
The common or area gap
This type of gap gets its name from its tendency to occur within a trading area or Price
Congestion Pattern. All of the Congestion Formations we have studied in the preceding
chapters—both Reversal and Consolidation types—are attended by a diminution in
trading turnover. The more strictly defined sorts—the Triangles and Rectangles—show
ZENITH RADIOZ E
40
30
20
10
1936 1937 1938 1939 1940 19411 9421 9431 9441 9451 946
Figure 12.4 As a matter of interest, this monthly chart of Zenith Radio is reproduced for comparison
with Figure 12.3. The Head-and-Shoulders Bottom is easily seen.
176 Technical Analysis of Stock Trends
this characteristic most conspicuously. Moreover, activity in these patterns tends to be
concentrated pretty much at or near the top and bottom edges, their Supply and Demand
Lines, while the area in between is a sort of “no-man’s land.” It is easy to see, therefore,
why gaps develop frequently within such areas. You will find numbers of good examples
of Pattern Gaps in the charts illustrated in Chapters 8 and 9.
Such Pattern Gaps are usually closed within a few days, and for obvious reasons, before
the Congestion Formation in which they have appeared is completed and prices break away
from it, but not always. Sometimes a gap will develop in the last traverse of prices across
the pattern area just before a breakout, and in such cases, it is not closed for a long time,
nor is there any reason why it should be.
The forecasting significance of Common or Pattern Gaps is practically nil. They have
some use to the technician simply because they help him recognize an Area Pattern—that
is, their appearance implies a Congestion Formation is in the process of construction. If, for
example, a stock moves up from 10 to 20, drops back to 17 , and then returns to 20, making a
gap in the course of that rally, it is a fair assumption that further pattern development will
take place between approximately 17 and 20. This is a convenient thing to know and may,
on occasion, be turned to profit in short-term trading policy.
Pattern Gaps are more apt to develop in Consolidation than in Reversal Formations.
Thus, the appearance of many gaps within an evolving Rectangle or Symmetrical Triangle
BLAW – KNOX BX
1946
FEBRUARYM ARCH APRIL MAY JUNE JULY
32
30
28
26
24
G
G
RD
Sales
100’s
125
100
75
50
25
2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27
Figure 12.5 The early 1946 daily chart of Blaw–Knox contained a number of interesting technical
features. Its spurt from 19 to 25 in December 1945 was followed by a nine-week Rectangle
Consolidation, the end of which appears in the chart above. Prices erupted from this Rectangle on
February 11 with a typical Breakaway Gap. Four days later, another gap appeared on even greater
volume, and prices closed at the top of the day’s range. This looked like a Runaway Gap, in which
case continuation to 32 was implied according to the “rule” stated above. (Note the Rectangle
“measurement” called for only 31.) On the following day, however, a One-Day Reversal, from 31
back to 30, appeared and the next session closed the February 15 gap, which now had to be relabeled,
tentatively, as an Exhaustion Gap. Prices subsequently dropped back to the support of the nine-
week Rectangle, rallied grudgingly along an established Intermediate Up Trendline, and broke that
on April 24 to return again to the 25 support. In May, another advance took “BK” up once more to
30, where it bumped against the previously broken trendline. That was its last effort; in late July,
the “valley” level at 25 was penetrated and a Major Double Top had been completed. To return to
the February 15 gap, this is fairly typical of many cases in which it is impossible to say whether
Continuation or Exhaustion is being signaled until two or three days after the day the gap is made.
177Chapter twelve: Gaps
reinforces the normal expectation that the pattern in question will turn out to be a
Consolidation rather than a Reversal Area.
Breakaway gaps
The Breakaway type of gap also appears in connection with a Price Congestion Formation,
but it develops at the completion of the formation in the breakaway move. Any breakout
through a horizontal pattern boundary, such as the Top of an Ascending Triangle, is likely
to be attended by a gap. In fact, it is safe to say that most of them are. And, if we consider
what goes on in the market to create a Flat-Topped Price Formation, it is easy to see why
Breakaway Gaps should be expected. An Ascending Triangle, for example, is produced
by persistent demand for a stock meeting a large supply of it for sale at a fixed price.
Suppose that supply is being distributed at 40. Other holders of the stock, who may have
intended originally to liquidate at 40.5 or 41, see quotations come up to 40 time after time,
stop there, and tu


it is easy to see why
Breakaway Gaps should be expected. An Ascending Triangle, for example, is produced
by persistent demand for a stock meeting a large supply of it for sale at a fixed price.
Suppose that supply is being distributed at 40. Other holders of the stock, who may have
intended originally to liquidate at 40.5 or 41, see quotations come up to 40 time after time,
stop there, and turn back. They tend, in consequence, either to join the crowd selling at 40,
BALTIMORE & OHIO BO 1936–1937
G
S S
H
OCTOBER NOVEMBER DE CEMBER JANUARY FEBR UARY MARCH
40
38
36
34
32
30
28
26
24
22
Sales
100’s
250
200
150
100
50
3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 6 13 20 27 6 13 20 27
Figure 12.6 This is a good example of a Runaway Gap that performed according to rule. After
reacting from 26 1/4 in late 1936, “BO” formed a Head-and-Shoulders Bottom (the left shoulder was
a Triangle) and broke out of it on February 6, 1937 . A small Flag formed immediately thereafter,
calling for 28. At that level, another Flag developed which signaled 30 1/4 or better. As prices reached
this latter goal, however, a gap was made, on March 3, on extraordinary volume. The next two days
confirmed this to be a Runaway or Continuation Gap. As such, it implied further advance (measuring
from the Head-and-Shoulders neckline) to 37 plus. “BO” made its Bull Market high at 40 1/4 on
March 17 . The measuring-gap rule should be used for purposes of “getting out” rather than “getting
in.” It does not guarantee a move will continue to the implied limit, but it does give assurance the
move is near an end when the rule has been fulfilled.
178 Technical Analysis of Stock Trends
or else to figure that once through 40, prices will go much higher; they may either lower or
raise their selling price. The result is a “vacuum” on the books, a dearth of offerings in the
price range immediately above the pattern. Hence, when the supply at 40 in our Ascending
Triangle example is finally all absorbed, the next buyer of the stock finds none offered
at 40.125 or 40.25 and he has to bid up a point or more to get his shares, thus creating a
Breakaway Gap.
As we remarked earlier in this chapter, gaps of this type actually occur on almost every
decisive breakout from a Horizontal Congestion, although many of them do not show
on the charts because they occur during a day and not between one day’s close and the
following day’s opening. Breakaway Gaps also develop at times when prices move out of
other types of Reversal or Consolidation Formations; they are not uncommon in connection
SOUTHERN PACIFIC SX
1937
JULY AUGUST SEPTEMBER OCTOBER NOVEMBERD ECEMBER
S
S H
G
RD
S S H
48
44
40
38
36
34
32
30
28
26
24
22
20
19
18
17
Sales
100’s
250
200
150
100
50
3 10 17 24 31 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 4 11 18 25
Figure 12.7 Panic Declines often produce large Runaway Gaps. The September 7 gap in this chart,
judged by its size, volume, subsequent action, and the fact that it was made in “new low ground,”
marked it as being of the measuring type. The implied goal was 26 or below. All other gaps in this
chart were obviously of the “common” variety.
179Chapter twelve: Gaps
with Head-and-Shoulders Patterns, for instance, and they even occur on the penetration of
trendlines, which we shall discuss in a subsequent chapter.
What forecasting value can we ascribe to them? First, they serve to call attention to,
and emphasize the fact of, a breakout. There can be little doubt that a genuine breakout
has eventuated when prices jump out of a pattern with a conspicuous gap. False moves
are seldom attended by gaps. Second, they carry the suggestion that the buying demand
(or selling pressure, as the case may be) that produced the gap is stronger than would be
indicated by a gapless breakout. Hence, it may be inferred the ensuing move will carry
WILLYS – OVERLAND WO
1944
NL
G
G
G
G
APRILM AY JUNE JULY AUGUST SEPTEMBER
19
18
17
16
15
14
13
12
11
10
9
8
7
Sales
100’s
500
400
300
200
100
8 15 22 29 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26 2 9 16 23 30
Figure 12.8 The “skyrocket” run-up of Willys–Overland in June 1944 was marked by a number
of small gaps. The first two were too small to have much technical significance. The larger gap
made June 16 was marked by the “stickiness” of prices on that day as Exhaustion. A small Flag
Consolidation ensued. The June 27 gap also acted like an Exhaustion Gap insofar as price action was
concerned, but volume had declined instead of climbing to a new peak. On June 28, prices jumped
away again, so the June 27 gap was marked as another Runaway with an implied objective of 18 1/4
plus, which had already been reached. Note the Head-and-Shoulders Reversal that formed and the
subsequent Intermediate Reaction.
180 Technical Analysis of Stock Trends
A. O. SMITH CORPORATION SMC
1945–1947
G
96
88
80
76
72
68
64
60
56
52
48
44
40
38
Sales
100’s
50
40
30
20
10
ND JS FO ND JF MMMAJ JA M A
Figure 12.9 “SMC” is a thin stock whose daily chart is usually “full of holes,” but this large gap that
appeared on its weekly chart in September 1946 evidently possessed technical significance. Treated
as a Runaway measuring from the eight-week Congestion at 68, it called for a downside objective of
44 or below, which was duly fulfilled.
BALTIMORE & OHIO PFD. BO Pr
1946
JANUARYF EBRUARYM ARCH APRIL MAY JUNE
48
44
40
38
36
S SH
Sales
100’s
50
40
30
20
10
S
SH
G G-5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29
Figure 12.10 A small Island in the right shoulder of the Head-and-Shoulders Top that marked this
issue’s Major Reversal. The Island served only to emphasize the chart’s Bearish implications.
181Chapter twelve: Gaps
prices farther or faster, or both. It does not do to make too much of this point; it is a logical
inference and one that has been borne out in the majority of cases, but it has its exceptions
and may prove most dis


he right shoulder of the Head-and-Shoulders Top that marked this
issue’s Major Reversal. The Island served only to emphasize the chart’s Bearish implications.
181Chapter twelve: Gaps
prices farther or faster, or both. It does not do to make too much of this point; it is a logical
inference and one that has been borne out in the majority of cases, but it has its exceptions
and may prove most disappointing on occasion. Nevertheless, other things being equal , of
two stocks that emerged from Ascending Triangles at the same time, we should choose to
buy the one that gapped out over the one that pushed its way out by small fractional steps.
Except for the presumption of somewhat greater “steam” behind the move, the Breakaway
Gap carries no particular measuring implication, nor any other forecasting significance. The
next question is this: should we expect a Breakaway Gap to be closed within a relatively
short time? Or, to put the question in more practical and pragmatic terms: should we defer
buying in the expectation that it will be closed before any worthwhile move develops?
To give a fair answer to that question, it is necessary to scrutinize the volume of
transactions before and after the gap. If a great many sales were recorded at the takeoff level
from which prices jumped the gap, but relatively few as prices moved away from the far
side of the gap, then there is a chance—perhaps about 50–50—that the next Minor Reaction
will carry prices back to the edge of the pattern of origin, thus filling the gap. On the other
hand, if high volume developed at the far side of the gap, and a great many transactions
took place there as prices moved on away from the gap, then the chances are remote that
any near-term Throwback will close the gap. In such cases, a Throwback reaction is almost
always stopped at the outside of the gap.
(One is constantly tempted in a work of this sort to employ the words always or never
without qualification. Unfortunately, the authors have never been able to discover a rule of
techniques to which the market did not, on rare occasion, produce an exception. It is always
necessary to be on guard against such exceptional developments. Many of them are caused by
general market conditions that counteract the technical trend in individual issues. Keep an eye
on the charts of the “ Averages,” as well as the particular issues in which you are interested.)
Where Breakaway Gaps develop intraday, the daily chart cannot, of course, indicate
how the day’s volume was distributed. In that event, it may be necessary to examine the
LION OIL COMPANYL NO
1947
MARCHA PRIL MAYJ UNE JULY AUGUST
GG
28
26
24
22
20
19
Sales
100’s
50
40
30
20
10
8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30
Figure 12.11 Island “shakeouts” are not uncommon in “thin” stocks. Why they should develop as
they do is hard to explain, but their forecasting implications are obvious.
182 Technical Analysis of Stock Trends
ticker tape or ask your broker to refer to the published record of individual transactions to
which most brokerage firms subscribe. (EN: This data may now be easily obtained. See Appendix
D, Resources. EN9: Candlestick charts, now much in use, will allow the analyst to see the intraday
breakaway gap.) Lacking any clear-cut volume clue, it is safest to figure that a Breakaway Gap
will not be filled until long after the full move implied by the pattern of origin (usually a
move of Intermediate Extent in the Dow sense) has been carried out.
Continuation or runaway gaps and the measuring rule
Less frequent in their appearance than either of the two forms we have discussed above,
gaps of the Continuation or Runaway type are of far greater technical significance because
BETHLEHEM STEEL BS
1937
G G
JANUARYF EBRUARY MARCHA PRIL MAYJ UNE
128
120
112
104
96
88
80
76
72
68
64
60
56
Sales
100’s
250
200
150
100
50
2 9 16 23 30 6 13 20 27 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26
Figure 12.12 This Island Reversal Pattern at Bethlehem Steel’s Major Top in 1937 is a “classic,” yet it
was followed by a curious and disturbing abnormality in the strong rally that developed on March
30. Those who sold out on the Island’s signal around 95 on March 19 or 20 were startled, and, if they
had also sold short, justifiably alarmed when prices jumped up a week later, not only through the
second gap level but well above it. But eventually, as can be seen, everything worked out according
to the original forecast. This incident will illustrate a general principle: when a clear-cut technical
pattern of unquestionable significance has been completed on your charts, do not let some apparently
contrary development that occurs shortly thereafter lead you to forget or neglect the previous plain
signal. Give such situations time to work out. Figure 12.2 shows the sequel to the above chart and,
incidentally, another Island. Compare the volume.
183Chapter twelve: Gaps
PENNSYLVANIA RAILROADP A
1936
JULY AUGUST SEPTEMBERO CTOBER NOVEMBERDECEMBER
44
40
38
36
34
32
30
28
Sales
100’s
125
100
75
50
25
XD .50
G G
4 11 18 25 1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 5 12 19 26
Figure 12.13 This looked like an Island in “PA,” but the second gap was actually attributable to a
$0.50 dividend which went ex on November 20 and, therefore, had to be discounted technically. Due
to this dividend, it was necessary to lower the Support Line at 40 (see Chapter 13) by half a point.
That Support, therefore, was not violated in December and prices subsequently advanced to above
50 the following March.
Figure 12.14 TLT shown here in computer notation produces gaps in profusion. As the reader can
see, if one just traded in the direction of the gap many short-term scalps would be garnered. This
chart also lends perspective to the hand drawn charts. A gap is a gap is a gap.
184 Technical Analysis of Stock Trends
they afford a rough indication of the probable extent of the move in which they


rch.
Figure 12.14 TLT shown here in computer notation produces gaps in profusion. As the reader can
see, if one just traded in the direction of the gap many short-term scalps would be garnered. This
chart also lends perspective to the hand drawn charts. A gap is a gap is a gap.
184 Technical Analysis of Stock Trends
they afford a rough indication of the probable extent of the move in which they occur. For
that reason they have sometimes been called “Measuring” Gaps.
Both the Common or Pattern Gap and the Breakout Gap develop in association with
Price Formations of the Area or Congestion type, the former within the formation and
the latter as prices move out of it. The Runaway Gap, on the other hand, as well as the
Exhaustion Gap, which we will take up later, is not associated with Area Patterns, but
occurs in the course of rapid, straight-line advances or declines.
When a dynamic move starts from an area of accumulation, the upward trend of
prices will seem often to gather “steam,” to accelerate for a few days, perhaps a week
or more, and then begin to lose momentum as supply increases when the very extent
of the advance invites more and more profit-taking. Trading volume jumps to a peak on
the initial breakout, tapers off somewhat in the middle of the advance, and then leaps
up again to a terrific turnover as the move is finally halted. In such moves—and in rapid
declines of corresponding character—a wide gap is quite likely to appear at the time
when the Runaway is at its height, when quotations are moving most rapidly and easily
with relation to the volume of transactions. That period comes normally at just about the
halfway point between the breakout that inaugurated the move and the Reversal Day or
Congestion Pattern that calls an end to it. Hence, a Continuation or Runaway Gap affords
an approximate measurement of the move in which it develops. Its inference is that prices
will go as much farther beyond the gap as they already have gone between the beginning of the
move and the gap, as measured directly (and vertically) on the chart.
Since there is a tendency for advances to run, in terms of points, beyond the price
levels arithmetically implied by this rule, and for declines to be more strictly limited, the
gap-measuring rule works out particularly well when applied directly on semilogarithmic
scale charts. On arithmetic charts, look for a trifle more on the upside and a trifle less on the
downside. (In any event, you will be wise to “bank” on something short of the theoretical
goal.)
Runaway Gaps are easy to find and identify in retrospect, but our task is to recognize
them as such at the time they appear; there is no danger of confusing them with Pattern or
Breakout Gaps. With those aside, any gap that shows up in a fast advance or decline after
prices have moved well away from an Area Formation (or the penetration of an important
trendline or break through a potent Support or Resistance Level, which we shall discuss
later) may be a Runaway Gap. What then becomes necessary is to distinguish it from our
next type, the Exhaustion Gap. Usually, the price and volume action on the day following
the gap furnishes the evidence required for a safe diagnosis.
Two or more runaway gaps
It will be much easier to bring out the characteristics distinguishing Runaway and
Exhaustion Gaps when we take up the latter in detail. Before doing so, we must mention
those cases in which two and, rarely, even three gaps intervene in a fast move and are
evidently all classifiable as of the Continuation or Runaway breed. It does not happen often
and is particularly unlikely to appear in the chart of a fairly large and active issue, but one
of the thinner stocks in the midst of a “skyrocket” move may go skipping along for three
or four days, making gaps between each successive pair. The only question of practical
importance that arises in such cases is this: where should the halfway measuring point
be located? No quick and easy rule can be laid down, but studious inspection of the chart,
especially of the volume trend, will usually afford an answer. Remember that halfway in
these fast moves tends to come at the stage at which prices are moving most easily and
185Chapter twelve: Gaps
rapidly with respect to the number of transactions recorded (hence the tendency to gap).
If there are two gaps, the halfway stage may very likely have been reached somewhere
between them. Inspect your chart carefully and try to “average” the picture mentally; look
for what appears to be the center of “thinness” and use that for your measuring level. But
remember also that each successive gap brings the move inevitably nearer to Exhaustion,
so let your judgment lean to the conservative side; do not expect too much of the second
or third gap.
Exhaustion gaps
The Breakout Gap signals the start of a move; the Runaway Gap marks its rapid continuation
at or near its halfway point, and the Exhaustion Gap comes at the end. The first two of these
are easily distinguished as to type by their location with respect to the preceding price
pattern, but the last is not always immediately distinguishable from the second.
Exhaustion Gaps, like Runaway Gaps, are associated with rapid, extensive advances
or declines. We have described the Runaway type as the sort that occurs in the midst of
a move that accelerates to high velocity and then slows down again and finally stops as
increasing Resistance overcomes its momentum. Sometimes, however, “skyrocket” trends
evidence no such gradual increase of Resistance as they proceed, showing no tendency
to lose momentum, but rather continue to speed up until, suddenly, they hit a stone wall
of supply (or, in cases of a decline, demand) and are brought to an abrupt end by a day
of terrific trading volume. In such moves, a wide gap may appear at the very end, that is,
between the next to the last and the last day of the move. This gets the name of Ex


istance as they proceed, showing no tendency
to lose momentum, but rather continue to speed up until, suddenly, they hit a stone wall
of supply (or, in cases of a decline, demand) and are brought to an abrupt end by a day
of terrific trading volume. In such moves, a wide gap may appear at the very end, that is,
between the next to the last and the last day of the move. This gets the name of Exhaustion
Gap because the trend seems thereby to have exhausted itself in one final leaping spurt.
The best test of whether a gap formed in a rapid, straight-line advance or decline is of
the Continuation or Exhaustion type comes on the day after the gap (more precisely, the
day that makes the gap), although there are frequently other clues in the preceding chart
picture. If trading activity mounts to an extraordinary height during the session following
the gap, and particularly if the previous trend in prices does not appear to be carried along
at a pace commensurate with that day’s activity, the gap is probably of the Exhaustion class.
This interpretation is reinforced, in fact, made a virtual certainty, if the day after, the gap
develops into a Reversal Day (as described in Chapter 10) with the closing price registered
back near the edge of the gap.
Evidence that may be derived from the chart anteceding the gap may be enumerated
as follows: If the trend has already carried out the full implications of the price formation
or Congestion Area from which it emerged, Exhaustion is more likely than Continuation.
By the same token, if the reasonable measuring implications of the pattern of origin are
still far short of attainment, the gap is probably of the Continuation type. An Exhaustion
Gap is seldom the first gap in a runaway move; it is usually preceded by at least one
Continuation Gap. Thus, you may ordinarily assume (unless the contrary appears from
other and weightier indications) the first gap in a rapid advance or decline is a Continuation
Gap, but each succeeding gap must be regarded with more and more suspicion, especially
if it is wider than its predecessor.
We have referred to Exhaustion Gaps as wide gaps. Width is, of necessity, relative in
this study; it is impossible to lay down any exact rules to define wide or narrow. Do not let
this bother you too much. Recognition of what constitutes an unusually wide gap for the
particular stock you have under observation soon comes with a little charting experience.
Runaway Gaps are usually not covered for a considerable length of time, as a rule, not
until the market stages a swing of Major or full Intermediate proportions in the opposite
186 Technical Analysis of Stock Trends
direction. But Exhaustion Gaps are quickly closed, most often within two to five days, a
fact that furnishes a final clue to distinguish Exhaustion from Continuation, if it should
still be needed at that stage. This, incidentally, upsets the common superstition that all
gaps must be closed before the trend can be trusted to continue very far. In the case of the
Runaway Gap, it is not closed, but the trend moves right along, nevertheless, and often for a
surprising distance. In the case of the Exhaustion Gap, the closing of it actually contributes
to the signal the trend has run out.
An Exhaustion Gap, taken by itself, should not be read as a sign of Reversal, or even,
necessarily, of Reversal at all. It calls “stop,” but the halt is ordinarily followed by some sort
of area pattern development that may, in turn, lead to either Reversal or Continuation of
the move before the gap. In practically every case, however, enough of a Minor Reaction or
delay ensues from the formation of an Exhaustion Gap before a new trend is established
to warrant closing out commitments at once. (One can always reenter if it subsequently
appears that the previous trend is to be resumed.)
The Island Reversal
We mentioned (at the end of Chapter 10 ) a Reversal Pattern, the Island, which was to be
taken up under the general study of gaps. The Island Pattern is not common and it is not, in
itself, of major significance in the sense of denoting a long-term Top or Bottom, but it does,
as a rule, send prices back for a complete retracement of the Minor Move that preceded it.
An Island Reversal might be described as a compact trading range separated from
the move that led to it (and that was usually fast) by an Exhaustion Gap and from the
move in the opposite direction that follows it (and that is also equally fast, as a rule) by
a Breakaway Gap. The trading range may consist of only a single day, in which event it
normally develops as a One-Day Reversal, or it may be made up of from several days to a
week or so of Minor Fluctuations within a compact price zone. It is characterized, as might
be expected, by relatively high volume. The gaps at either end occur at approximately the
same level (they should overlap to some extent) so that the whole area stands out as an
Island on the chart, isolated by the gaps from the rest of the price path.
We have said an Island does not, of itself, appear as a Major Reversal Formation, but
Islands frequently develop within the larger patterns at turning points of Primary or
important Intermediate consequence, as, for example, in the head of a dynamic Head-and-
Shoulders Top. By the same token, they appear occasionally at the extremes of the Minor
Swings that compose a Triangle or a Rectangle (in which event, the gaps that set them off
are really better classified as Common or Pattern Gaps).
The reasons why Islands can and do develop—in other words, why gaps can and do
repeat at the same price level—will be more apparent when we take up the general subject
of Support and Resistance in a later chapter. Suffice it to repeat at this point that prices
can move most rapidly and easily, either up or down, through a range where little or no
stock changed hands in the past, where, in other words, previous owners have no “ves


velop—in other words, why gaps can and do
repeat at the same price level—will be more apparent when we take up the general subject
of Support and Resistance in a later chapter. Suffice it to repeat at this point that prices
can move most rapidly and easily, either up or down, through a range where little or no
stock changed hands in the past, where, in other words, previous owners have no “vested
interest.”
Sometimes the second gap—the Breakaway that completes the Island—is closed a few
days later by a quick Pullback or reaction. More often it is not. Rarely, the first gap—the
Exhaustion Gap that starts the Island—is covered in a few days before the second gap
appears, in which event the Island Congestion takes on a sort of V-Shape (if it is a Top), and
there is no clear “open water” across the chart horizontally between the Island and the
trends preceding and following it. Yet, in any of these variations, the interpretation remains
the same: the preceding Minor Move should be practically retraced.
187Chapter twelve: Gaps
An Island Pattern is not easy to trade on unless it be for a short-term “scalp,” as,
obviously, a good share of the retracement already may have been accomplished by the
time the Island is charted and an order to buy or sell on its indications can be executed. If
the entering gap is recognized as an Exhaustion Gap, the trader who is interested in the
stock presumably will take action before the second gap forms and before the Island is in
evidence. Perhaps the greatest utility that Islands have for the chart analyst is that of calling
attention to a situation of putting him on the alert as to its potentialities.
Gaps in the Averages
Gaps appear also in nearly all Averages but, for obvious reasons, with rather less frequency
than in the charts of individual issues. Although it is not necessary for all of the stocks
composing an average to make a gap simultaneously to produce a gap in the Average
figures, a majority of them must. As might therefore be expected, Common or Pattern
Gaps are particularly rare in Average charts, but Breakaway and Runaway types are not
uncommon, although they are small as compared with the size of such gaps in single
stocks. Exhaustion Gaps, and, in consequence, Islands, again are rare. The conditions that
create an Exhaustion Gap seldom develop in a sufficient number of individual issues at any
one time to produce a counterpart in the Averages.
The technical interpretation of gaps in Averages is, in the main, the same as in single
stocks. The authors have not found that an Average gap possesses any peculiar potency
or significance over and above that attributable to a gap in the chart of any actively and
closely traded single issue.
The broader, and hence, most representative market indexes show the fewest and
smallest gaps. EN: On the other hand, the NASDAQ is quite volatile and a good gap producer.
It is suggested the reader review this chapter after he has finished studying the
principles of Support and Resistance in Chapter 13. (EN9: The truth is there is nothing more
that need be said about gaps, and the truth also is that no modern examples need be added. But gaps
are fun, so see Figure 11.11 and Chapter 16 for modern examples.)

189
chapter thirteen
Support and Resistance
As illustrated by Figures 13.1 through 13.12, the phenomena we shall study in this chapter are
markedly different in kind from those discussed in preceding sections. We shall look at the
stock market from a new angle and, in so doing, may find it possible to develop some very
practical additional rules to guide us in selecting stocks for purchase or sale, in estimating
their potential moves, and in foreseeing where they are likely to “run into trouble.” As a
matter of fact, some experienced traders have built their “systems” almost entirely on the
principles of what we call Support and Resistance, paying no attention to the specific pictorial
patterns of price and volume action we have been investigating in preceding pages.
Support and Resistance phenomena are not, by any means, unrelated to the various
patterns and formations previously studied. We have already had occasion to hint at a basic
principle of Support and Resistance in our explanation of gaps, and, as you read on, you
will find a number of the other patterns of price behavior are explained thereby, or at least
become more readily understood.
The term Support is commonly used in the Street. In one or more of its connotations, it
must be fairly familiar to the reader. For example, we may hear such-and-such a crowd is
supporting XYZ at 50 or is prepared to support the market by buying all stock offered on
any 5-point concession. For the purposes of this chapter, we may define Support as buying,
actual or potential, sufficient in volume to halt a downtrend in prices for an appreciable
period. Resistance is the antithesis of Support; it is selling, actual or potential, sufficient in
volume to satisfy all bids and, hence, stop prices from going higher for a time. Support and
Resistance, as thus defined, are nearly but not quite synonymous with demand and supply,
respectively.
A Support Level is a price level at which sufficient demand for a stock appears to hold
a downtrend temporarily at least, and possibly reverse it, that is, start prices moving up
again. A Resistance Zone, by the same token, is a price level at which sufficient supply of a
stock is forthcoming to stop, and possibly turn back, its uptrend. There is, theoretically, a
certain amount of supply and a certain amount of demand at any given price level. (The
relative amount of each will vary according to circumstances and determine the trend.) But
a Support Range represents a concentration of demand, and a Resistance Range represents
a concentration of supply.
According to the foregoing definitions, you can see the top boundary of a Horizontal
Congestion Pattern such as a Rectangle is a Resi


certain amount of demand at any given price level. (The
relative amount of each will vary according to circumstances and determine the trend.) But
a Support Range represents a concentration of demand, and a Resistance Range represents
a concentration of supply.
According to the foregoing definitions, you can see the top boundary of a Horizontal
Congestion Pattern such as a Rectangle is a Resistance Level, and its bottom edge is a
Support Level; the top line of an Ascending Triangle is unmistakably a Resistance Level,
and so on. But we are more interested now in the reasons why Support or Resistance, as
the case may be, can be anticipated to appear at certain price ranges. Within reasonable
limits, and with a certain few exceptions to be examined later, it is quite possible to do this.
Expert chart readers are frequently able to make some amazingly accurate predictions as
to where an advance will encounter Resistance (supply) or where a declining trend will
meet Support.
The basis for such predictions—the elementary data from which Support and Resistance
theories are derived—is that turnover in any given issue tends to be concentrated at the
190 Technical Analysis of Stock Trends
several price levels at which a large number of shares changed hands in times past. Since
any level at which a great volume of transactions takes place usually becomes a Reversal
point (Major, Intermediate, or Minor) in that stock’s trend, it follows naturally that Reversal
Levels tend to “repeat.” However, here is the interesting and the important fact that,
curiously enough, many casual chart observers appear never to grasp: these critical price
levels constantly switch their roles from Support to Resistance and from Resistance to
Support. A former Top, once it has been surpassed, becomes a Bottom zone in a subsequent
downtrend; and an old Bottom, once it has been penetrated, becomes a Top zone in a later
advancing phase.
Normal trend development
Perhaps we can make this plainer by citing a typical example of normal trend development.
Suppose a stock in a Bull Trend moves up from 12 to 24, and there runs into a large volume
of selling. The result is a reaction that may take the form of a full Intermediate Correction to,
say, 18, or a series of Minor Fluctuations forming a Consolidation Pattern between, say, 24
and 21, the effect being the same in either case. Following this Correction or Consolidation,
a new advance gets under way and carries the price on up to 30 before running again into
supply in sufficient concentration to stifle the move. Now another reaction is evidently
due. Again, it may take the form of a sideways Consolidation Pattern or an Intermediate
Correction. If the latter, where will that corrective setback be reversed, or in other words,
will it meet Support? The answer is at 24, the level of the first Top in the trend. That is the
level (below current quotations) where a large turnover had previously occurred. Then it
functioned as Resistance, producing a halt or Reversal in the first upswing; now it functions
as Support, stemming and reversing, at least in a Minor sense, the latest downswing.
Why should this be? It will be easier to suggest an answer to that question if we first go
on with a similar example of typical action in a downtrend. This time, suppose our stock
makes a Major Top and declines from, say, 70 to 50. There, at 50, a temporary Selling Climax
occurs; there is a large turnover, prices rally, perhaps slip back for a “test” of 50, and then
stage a good recovery to 60. At 60, buying peters out, the trend rounds over, turns down,
and accelerates in renewed decline, which carries to a new low at 42. Again, a wave of
buying comes in and a second recovery swing gets under way. We can confidently expect
this recovery (from 42) will run into strong Resistance at 50. The price level that functioned
as a Support for the first phase of decline, now that it has been broken through the downside
by the second phase, will reverse its role and function as Resistance to the second recovery
move. The former Bottom level will now become a Top level.
Here, we may ask again why this should be so, and now we can suggest an answer. In
the example of downtrend action cited in the preceding paragraph, our stock first dropped
to 50, ran into considerable volume there, reversed its trend, and rallied to 60 with activity
dwindling on the rise. A lot of shares changed hands at 50, and for every seller there was a
buyer. A few of those buyers may have been covering short positions and, having done so,
had no further interest in the issue. Other short-term traders and professionals may have
purchased simply because they sensed a temporary Bottom in the making and hoped to
scalp a few points on the ensuing rally; presumably, they (or at least some of them) took
their profits and were out before prices broke very far on the next decline. But a majority
of those who acquired shares at 50, it is safe to say, did so because they thought the stock
was cheap at that price, figuring it had gone low enough. Only a few months ago, it was
selling above 70; surely, it was a bargain at 50 and could be picked up and put away “for
the long term.”
191Chapter thirteen: Support and Resistance
The explanation
Imagine yourself, for the moment, in the place of those new owners. They see prices turn
up, reach 55, 58, 60; their judgment appears to have been vindicated. They hang on until the
rally peters out and prices start to drift off again, slipping to 57 , 55, 52, and finally 50. They
are mildly concerned but still convinced the stock is a bargain at that price. Most likely,
there is momentary hesitation in the decline at 50 and then prices break on down. Briefly,
there is hope the break is only a shakeout to be recovered quickly, but that hope vanishes
as the downtrend continues. Now our new owners begin to worry. Something has gone
wrong. When the stock gets d


y 50. They
are mildly concerned but still convinced the stock is a bargain at that price. Most likely,
there is momentary hesitation in the decline at 50 and then prices break on down. Briefly,
there is hope the break is only a shakeout to be recovered quickly, but that hope vanishes
as the downtrend continues. Now our new owners begin to worry. Something has gone
wrong. When the stock gets down below 45, the former bargain does not look so good.
“Well, I guess I picked a lemon that time, but I won’t take a loss in it. I’ll just wait until it
gets back up to 50 some day where I can get out even (except for expenses), and then they
can have it.” (Does this sound familiar, by any chance?)
We can skip over the next few swings that “followed the rules” and go on to the change
in the picture, which came with the first notable violation of a Support Level in 1946. Prices
had pushed up the first of February nearly to 54, well out above the Tops around 46, which
formed the previous November. The late-February reaction should have “caught Support”
JONES & LAUGHLIN JL 1944–1947
1944 1945 1946 1947
52
48
44
40
38
36
34
32
30
28
26
24
22
20
Sales
100’s500400300
200
100
Figure 13.1 Why now was so much time spent and “work” done during mid-1945 under 33–34?
We cannot see it on this chart, but the previous monthly history shows that the Bottoms of long
Congestion Areas were made in this zone in late 1939 and late 1940. These old Bottoms, representing
Support, originally, were able to produce some supply (Resistance) five years later. Once prices had
worked through that supply, however, they were able to rise quickly to 44, and then their subsequent
reaction found Support just where you might have expected—at 33–34. Support had turned to
Resistance and then to Support again.
192 Technical Analysis of Stock Trends
around 46—but it did not; it crashed on down to the “round figure” 40. This was an ominous
(although not necessarily “fatal”) development. Thereafter, a massive Symmetrical Triangle
was formed and broke downside in September.
The first Panic Decline in the Bear Market is no respecter of Support Levels. This one
was no exception, although it is noteworthy that prices “bounced” several times from the
important old 33–34 zone. By November, the Top Triangle’s measurement had been exactly
fulfilled. (You should turn back to this record and study it again after you have read further
in this chapter.)
Take the opposite side of the picture—the uptrend process. You, along with many
others, bought XYZ at 12, carried it up to 24, decided that was plenty high for it, and cashed
in. Thereupon XYZ reacted to 20, and you congratulate yourself on your astuteness. But
then, unexpectedly, it turns around and rushes up to 30. Now you do not feel as smart
knowing that was a better stock than you gave it credit for being. You wish you had it back,
yet you will not pay more for it; if it comes back down to 24, the price at which you sold,
you’ll “reinstate your position.”
Perhaps you have never been in either of these situations. Perhaps your own reactions
would not, in such cases, have been the same as those we have indicated. If you have had
a fair amount of experience in the market—have some knowledge of the psychology of the
“average investor”—you know the pictures described are typical.
At this point, you may not be satisfied we have succeeded in giving an adequate
explanation for our basic principle of Support and Resistance Levels. Remember, however,
that the supply and demand balance in the market is nearly always a delicate thing. Only
a moderate oversupply at any one price will suffice to stifle an advance; only a little extra
demand concentrated at a certain level will stem a decline. Remember, other traders
are watching the tape as well and will be quick to sense any change in the situation
and be quick to join the parade whenever a change in trend appears to be developing.
Consequently, orders to buy or sell a few hundred shares may induce the transfer of
several thousand.
Another point worth bearing in mind is that the traders and investors who (because of
the presumption their previous mistakes in either selling or buying prematurely) created
Support and Resistance Levels are not necessarily ignorant or inexperienced. On the
contrary, we must list them among the wiser and more alert of those who operate in the
market. To make one more use of our previous theoretical example of typical downtrend
action, those who bought at 50 were certainly smarter than those who bought at the top (70)
or on the way down to 50, even though the latter price was broken later on. Giving them
credit for somewhat superior judgment, it follows that they may be expected to appraise
later developments pretty carefully and display something better than a wooden and
stubborn determination to “get out even” when it comes to selling on a Recovery Move.
Hence, in a marked Bear Trend “overhanging supply”; that is, stock bought at higher levels
by holders now waiting for a good chance to unload, will begin to come on the market below
the theoretical Resistance Level. Wise owners will be willing to sacrifice a point or so to
avoid getting caught in a worse loss.
By the same token, “sold-out Bulls,” when a Major Uptrend is under way, may be
willing to pay a point or two more to replace the shares they had previously cashed in too
soon. Thus, it is characteristic of reactions in well-established (second phase) Bull Markets
to drop back only to the very uppermost limits of a Support Range—and for recoveries in
established Bear Markets to reach only the lowest edges of Resistance Zones, or perhaps
even fail of that by an appreciable margin. We shall have more of this sort of thing to point
out later on, but first we must take up two other matters—how to estimate the potential
193Chapter thirteen: Support and Resistance
importance of Support and Resistance Zones, and how to more


and for recoveries in
established Bear Markets to reach only the lowest edges of Resistance Zones, or perhaps
even fail of that by an appreciable margin. We shall have more of this sort of thing to point
out later on, but first we must take up two other matters—how to estimate the potential
193Chapter thirteen: Support and Resistance
importance of Support and Resistance Zones, and how to more accurately locate the centers
of axes of such zones.
Estimating Support–Resistance potential
To go back to first principles, the Resistance that an upward move may meet at any given
level depends on the quantity of stock overhanging there—the number of shares previously
bought at that price by owners who now would like to get out without loss. Obviously then,
volume is our first criterion in estimating the power of a Resistance Range. An old Minor
Bottom level, at which only four or five hundred shares changed hands, cannot set up much
Resistance to a subsequent advance, but a Selling Climax Bottom, where several thousand
shares were bought, will provide a lot of potential supply after prices have dropped well
below it, at some later date, and then attempt to rise up through it again.
A long Rectangle or a Descending Triangle has a number of Bottoms at the same level.
We can get a crude approximation of the amount of Resistance there by summing up the
volume of trading on all its Bottoms, but then some discount must be taken for the shares
that may have been bought at the Bottom of the pattern in its early stages and then sold
near the Top before it was completed. In brief, a single, sharp, high-volume Bottom offers
somewhat more Resistance than a series of Bottoms with the same volume spread out in
time and with intervening rallies.
Another criterion is the extent of the subsequent decline. Or, to put it another way, how
far prices will have to climb before they encounter the old Bottom zone whose Resistance
potential we are attempting to appraise. Generally speaking, the greater the distance, the
greater the Resistance. Suppose PDQ sells off from 30 to 20, “churns” at that level for several
days, rallies to 24, and then drifts back down to 19. Investors who picked it up at 20 will
not be greatly concerned at that stage. If a rally now develops from 19, there will be little or
no disappointed selling at 20. Should prices dip to 18 before the rally starts, there may be
some supply forthcoming at 20, but still not a formidable quantity. From 17 , Resistance will
become evident. In brief, prices have to break far enough below the price at which a trader
bought his stock to convince him that he made a bad investment and, hence, that he should
sell when he gets a chance to do so without too great a loss.
It is impossible to formulate any precise rule or equation to define how far a decline
must proceed to set up Resistance above it. However, do not look for much supply to come
out of a Bottom level in the low-middle price ranges (20–35) unless the trend later takes
quotations more than 10% under it. This 10% rule cannot be applied to very low-priced
issues. A man may buy a stock at 5 and see it drop to 4 or 3.5 with considerable equanimity
despite the fact he stands a loss of 30% at the latter figure. His “dollar” loss looks small, and
he still thinks it will be easy for his stock to get back up to 6 or 7; so, he is willing to wait.
Another factor enters into and reinforces the “extent of decline” criterion. If our PDQ
rallies, as before, from 20 to 24 and then drops rapidly to 12, not only will many of the old
owners at 20 be thoroughly disgusted and glad to get out at that price, given an opportunity,
but the new owners at 12 also will be pleased to take 20 (66 2/3% profit) and quick to do
so if they detect any signs of trouble there. New buyers at 18, needless to say, would not be
quite so ready to sell at 20.
A third criterion for appraising the Resistance potential at an old Bottom level is the
length of time that has elapsed since it was formed and the nature of general market
developments in the interim. You will, no doubt, find it reasonable to suppose that an
Intermediate Bottom formed in the early stages of a Bear Market will offer relatively little
Resistance after prices have fallen far below it, have taken perhaps the better part of a year
194 Technical Analysis of Stock Trends
to make a Major base, and then have gradually climbed up to it again four or five years
later. To some small extent, this is true. A supply only a year or two old is apt to be more
effective than one that is four or five years old, but the latter does not lose all of its potency
by any means. In fact, it is often surprising how effective the Resistance will be at a very old
Bottom zone, provided it has not been “attacked” in the interim, and provided no changes
have been made in the capitalization of the company that might obscure, in the mind of
the owner, the original cost of his stock. Under the latter heading, we would put split-ups
and large stock dividends, or even an unusually generous cash “melon.” We do not mean
to imply that an investor is ever actually deceived as to the actual cost of his shares, no
matter how they may have been split, or what dividend distribution has been made, but
his disappointment (and desire to get out even) may be abated.
If, however, a Resistance Zone has once been attacked—if prices have come back up
to it, hit it, and then retreated—some of its power has obviously been removed. Some of
its overhanging supply has been used up in repelling the first attack. The next advance,
therefore, will have less stock to absorb at that level. Here again, the volume chart may be
looked to for some approximation of the amount of Resistance consumed. In any event, it is
an odds-on assumption that a third attack at a Resistance Level will succeed in penetrating it.
We have named three criteria—volume, distance away, and time elapsed—to be


elling the first attack. The next advance,
therefore, will have less stock to absorb at that level. Here again, the volume chart may be
looked to for some approximation of the amount of Resistance consumed. In any event, it is
an odds-on assumption that a third attack at a Resistance Level will succeed in penetrating it.
We have named three criteria—volume, distance away, and time elapsed—to be used
in assessing the amount of Resistance to be expected at any given level. At this point, it
must be apparent (and perhaps disappointing) to the reader that his own judgment must
play a large role in applying them. This cannot be helped; it is impossible to set up an exact
mathematical formula for any of them.
But, after all, the problem is not too complicated. The general principles are simple
enough and, we believe, easy to understand. We can look back at the charted history and
see where, in the last preceding downtrend, a Bottom formed that may produce more or
BENDIX AVIATION BX
1944–1945
56
52
48
44
40
38
36
34
Sales
100’s
50
40
30
20
10
JF SO ND JF MMM AJ JA MAJ
Figure 13.2 Support–Resistance Levels in a long Intermediate Uptrend. The reader will need no
guidance in applying the principles stated in this chapter to the Bendix weekly chart reproduced
above. Observe that when prices broke down in 1945 through a long trendline, their decline stopped,
nevertheless, at the Support set up by the previous November’s Top.
195Chapter thirteen: Support and Resistance
less Resistance when the current advance reaches back up to its range. We have to estimate
how much supply resides there, how many shares were bought originally at that price and
are still held by owners who may welcome a chance to get out even.
The greatest danger in applying judgment to the measuring of these factors lies in
underestimating the amount of Resistance to be expected. Guard against that effort; it
is safer always to overestimate it. You may be Bullishly disposed yourself; you may say,
“Those fellows who were hung up there in this stock must realize that conditions have
improved, and they will not be so anxious now to sell.” Don’t count on it. Recall, they have
been “hung up” for a long time; even if they are mildly Bullish on the market in general,
they may be so disappointed with this particular stock that they want to switch out of it
and try something else. (The stubborn and often costly refusal of the average American
investor to “take a loss” operates even against timely switching.)
Everything we have said in the foregoing paragraphs about estimating potential
Resistance applies as well—but in a reverse direction, of course—to estimating potential
Support. The principles are precisely the same, even though the underlying rationale may
be less easy to grasp.
NATIONAL DISTILLERS DR
30
25
20
15
10
5
3 for 1 3 for 1
1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1947 1948
Figure 13.3 For Major Support–Resistance Level study, monthly charts are most useful. This one
presents many points of interest. Observe how important levels are formed and how, once formed,
they appear again, and reverse their roles. The price scale shows 1947 values with previous years
adjusted for the splits of 1933 and 1946.
196 Technical Analysis of Stock Trends
Prices were able to “skyrocket” when that Resistance was finally overcome. You will
find that several additional Support–Resistance Lines might have been drawn on this chart.
Note Major Bottom Formations of 1937–1938 and 1942.
Locating precise levels
Our next problem to consider is how, in practical day-to-day chart analysis, we can locate
as exactly as possible the limits of a Support or Resistance Range and, in many cases,
the specific price figure representing the core or axis of such a range. In the theoretical
examples we have made up so far to illustrate basic principles, we have used even
figures, but in actual trading, the levels are seldom so nicely marked. Even the sharp and
relatively patternless Bottom of a Recession may consist of a week of price fluctuations
within a narrow range. Perhaps the lowest day of that week’s Congestion will appear on
the chart as a One-Day Reversal, or there will be two or three days that “spike” down
below the general mass. Here again, although no mathematical rule can be laid down, it
is easy to relate the price and volume patterns visually, and by simple inspection, arrive
at a near estimate of the figure at which supply in quantity is likely to be forthcoming.
Look particularly at the closing levels of the days making up the Bottom Congestion and
average them mentally; this figure is apt to be pretty close to the “center of gravity” of
the entire Resistance Area.
Some supply is likely to start coming in as soon as a subsequent advance reaches the
bottommost fraction of the Resistance Zone, and more and more will appear as the move
KRESGE (S.S.) CO. KG
50
40
30
20
10
Sales
100’s
800
400
1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 13.4 Particularly noteworthy in this monthly record is the Resistance met in 1939, 1940, 1941,
and even in 1944, at the Bottom level (just above 26), the three-month Congestion of 1936. Also, the
appearance eight years later (!) in 1945 of Resistance at the Bottom level (28) of the High-Volume Top
Congestion of 1936–1937.
197Chapter thirteen: Support an d Resistance
pushes up into it. Sometimes, it is possible to predict “to a hair” just how far prices will
penetrate a Resistance Range by carefully comparing the vigor (volume of trading) on
the advance with the volume registered at various levels in the original formation of the
Resistance. This takes experience, but it is experience that you will find quite easy and not
at all costly to gain. In most cases, however, it is neither necessary nor particularly desirable
to be so exacting.
Nearly every chart in this book shows some example of Support a


he vigor (volume of trading) on
the advance with the volume registered at various levels in the original formation of the
Resistance. This takes experience, but it is experience that you will find quite easy and not
at all costly to gain. In most cases, however, it is neither necessary nor particularly desirable
to be so exacting.
Nearly every chart in this book shows some example of Support and Resistance
phenomena, and the reader should make it a point when he has finished this chapter to
go back over and study them all in detail. The practical application of the rules we have
been discussing will be greatly clarified. Equally instructive, if you can manage to obtain
such a collection, is a study of the Support and Resistance Levels appearing in the monthly
charts of all actively traded stocks over a period of 10 years or more. EN: Easily generated
by most currently available software and on the internet at stockcharts.com and other sites. You
will undoubtedly be amazed to see how Tops, Bottoms, and Sideways Congestions tend to
form at the same approximate levels in successive Major Swings, while prices move freely
and rapidly, up or down, through the ranges between such levels. It is hardly necessary
to dwell on the practical dollars-and-cents value of such information that may be derived
from the chart history.
This brings up a matter that we may as well pause to consider here—the kind of charts
most useful for locating and appraising Support and Resistance Levels. For near-term Minor
Moves, the daily chart is naturally the only source of information, and a daily chart record
that extends back for a year or more may, if necessary, be used in the location of levels
of Intermediate Trend importance. The writers have found, however, that a daily chart
does not give the perspective on the long range that one really needs to determine Major
and Intermediate Support and Resistance Zones. It is apt to overemphasize the potential
of a recently set up Minor Support (or Resistance) Zone and obscure the importance of a
true Intermediate Level. For true perspective, a weekly chart, showing volume as well as
price ranges, and covering at least the whole previous Major Bull and Bear cycle, is most
desirable. Also, very good results can be obtained with a little study and experience from
monthly charts.
To return to our study of Support phenomena, we have had several occasions to refer in
previous chapters to a “normal” trend. What we have had in mind might perhaps be better
called an “ideal” trend because, like so many other so-called normal things, it represents a
pattern from which the facts of experience frequently deviate. In stock trends, nevertheless,
this normal or ideal appears as a fairly common pattern. If it is an uptrend, it consists of
a series of zigzags ( EN10: think waves, as in Chapter 28), each “zig” carrying prices to a
new high and each “zag” taking them back to the approximate top of the preceding “zig.”
To illustrate with figures, up to 10, back to 6, up to 15, back to 10, up to 20, back to 15, up
to 26, back to 20, and so on. Such a move is what technicians refer to as “self-correction”
and regard as particularly sound and, hence, likely to be continued. You can see it really
represents a reaction to the nearest Minor Support Level following each step forward. If
you become interested in an issue with such a trend pattern, the normal return to a Support
produces a good place to buy.
Significance of Support failure
Sooner or later, however, a normal Minor Wave Pattern is bound to be broken up. This
generally occurs in one of two ways (although there is an infinity of possible variations).
In one, prices spurt away in an advance out of all proportion to the previous succession
198 Technical Analysis of Stock Trends
of up waves. Such a move is seldom followed by a reaction to the Support now left far
behind, but rather, by the construction of some sort of Area Pattern—which may be either
Consolidation or Reversal.
The other type of disruption appears when a reaction does not halt and reverse at the
level of the previous Minor Top, but sifts on down through that zone, perhaps to the level
of the preceding Minor Bottom. This move has “broken its Support,” and any such action
carries a distinct warning of a change in trend, a particularly emphatic warning if activity
shows a tendency to increase as or after the Support is violated. Note we said change in
trend rather than Reversal because the puncturing of a Minor Support Level may signify
only a halt for sideways Consolidation, yet it may also foretoken an impending Reversal;
either of these is a change.
If you will now call to mind the picture of a typical Head-and-Shoulders Top, you will
see the decline from the head constitutes just such a break in Minor Support because it
comes down through the level of the top of the left shoulder. You will recall this decline
is often the first intimation we have that something in the nature of a Reversal Formation
is developing.
Thus, even the violation of a nearby Support Level has a practical meaning in technical
chart analysis. The breaking of a Minor Support should always be regarded as the first
step in the Reversal of the Intermediate Trend. (If it turns out to be Consolidation only,
there will be an opportunity later to reenter an abandoned commitment if desired.) By the
same token, the breaking of an Intermediate Support Range is frequently the first sign of a
Reversal in the Major Trend. We do not believe it is necessary to expatiate further on this
principle. Recommended trading tactics based thereon are discussed in Section II of this
book; Support and Resistance Levels are particularly useful as Basing Points for stop-loss
orders, which are discussed there.
Popular misconceptions
The reader will understand all we have said here about the breaking of Supports applies as
well, but in reverse direction to the penetrati


ate further on this
principle. Recommended trading tactics based thereon are discussed in Section II of this
book; Support and Resistance Levels are particularly useful as Basing Points for stop-loss
orders, which are discussed there.
Popular misconceptions
The reader will understand all we have said here about the breaking of Supports applies as
well, but in reverse direction to the penetration of Resistance Levels. One more point may
well be mentioned before we leave this subject; if you happen to have spent much time in
JEWEL TEA CO.J WT
2 for 1
60
52
44
36
28
Sales
100’s
80
40
1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946
Figure 13.5 A monthly chart of Jewel Tea Company with its Major Support–Resistance Levels
marked. Note the reversal of roles.
199Chapter thirteen: Support and Resistance
boardrooms, you will have noticed the concepts of Support and Resistance prevalent there
are somewhat different from those outlined in this chapter. For example, if X has advanced
to 62, reacted to 57 , and then pushed on to 68, many traders will speak of 57 as being the
Support Level, presumably because that was the last price at which X was supported in
sufficient strength to turn its trend from down to up. We, as you have seen, would name the
vicinity of 62 as the Support Range. The distinction is important to grasp and sometimes
extremely important in practical results.
Admittedly, it does not come easy to think of a former Top as denoting the level at
which a later Bottom should form, or vice versa; it would seem superficially to be much
more logical to relate Top to Top and Bottom to Bottom. Moreover, it is perfectly true, to
use our X example again, that some of the investors who wanted to buy it at 57 might not
have succeeded in getting it before the second advance to 68 took it away, and their buy
orders might still stand at 57 or might be reentered on any return to that price. Nevertheless,
there is certainly no assurance that such is the case; there is no “vested interest” in X at 57
that will “automatically” bring in new buying. On the other hand, we have seen how there
is a sort of vested interest set up at an old Bottom that produces selling (Resistance), and
thereby creates a new Top, and at an old Top that produces buying (Support) and thereby
creates a new Bottom.
The reader is urged to keep this concept well in mind. Any analytical study of the chart
records will quickly show it is much easier for prices to push up through a former Top level
than through the Resistance set up at a previous volume Bottom (and vice versa, of course,
with respect to declines). You will find a little selling may come in at a former high, but
usually only enough to cause a brief halt rather than the more or less extensive reactions
or Consolidations that develop when the trend comes up against a real Resistance Zone.
REMINGTON RAND RR 1945–1947
48
44
40
38
36
34
32
30
28
26
Sales
100’s50
40
30
20
10
ND JS FO ND JF MMMAJ JA M A
Figure 13.6 When prices broke down out of the large Descending Triangle that formed on Remington
Rand’s weekly chart in 1946, the decline might have halted, at least temporarily, around 37 at the level
of the four-week Congestion made in April and should have “caught Support” at 35–36, the level of
the February top. Failure of the latter carried Major Trend significance. Note later Resistance at 40 1/2.
200 Technical Analysis of Stock Trends
The round figures
There are certain other levels that may, at times, evidently produce considerable Resistance
or Support without any reference to a previous “vested interest.” We have in mind the
“round” figures 20, 30, 50, 75, 100, etc. In setting a goal for taking profits when we buy a
stock, it is natural for us to think in terms of such round prices. If a low-priced stock has
advanced steadily from around 10, it is pretty certain on this account to meet with profit-
taking sales at 20, especially if that figure represents a new high for several years. In fact, any time
an issue gets out into new all-time high ground, where there is nothing in its chart history
to indicate otherwise, it is a fairly safe bet that Resistance will appear at the round figures.
In old and actively traded stocks, such as U.S. Steel (EN: or IBM and GE), the round figures
diminish in importance.
Repeating historical levels
If, once they had been set up, important Support and Resistance Levels always “worked,” we
should see Intermediate Tops and Bottoms form at exactly the same ranges year after year
in one Bull and Bear cycle after another. As a matter of fact, there is a well-marked tendency
for this to occur in old-line, actively traded stock. In General Electric, for example, the 22–24,
34–35, 40–42, and 48–50 zones were characterized by large turnover (and, consequently, by
many Intermediate Reversals of trend) throughout the 1920s and into the 1950s. In Southern
Pacific, there are historical Support and Resistance Zones at 21–22, 28–30, 38–40, and 55–56.
In U.S. Steel, 42–45, 55–58, 69–72, 78–80, and 93–96 are conspicuously marked as Reversal
YORK CORPORATIONY OK
1945–1946
OCTOBERN OVEMBERD ECEMBERJ ANUARY FEBRUARY MARCH
26
24
22
20
19
18
17
16
Sales
100’s
125
100
75
50
25
6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26 2 9 16 23 2 9 16 23 30
Figure 13.7 York is a relatively thin stock, which normally makes many small, technically
meaningless gaps, but its large, high-volume gap of October 8, 1945, demanded attention. It looked
like a Runaway Gap, and as such implied continuation to 26 1/2 plus, but prices halted their advance
at 24 1/2 and went into a three-month Rectangle. An upside breakout on January 10, 1946, carried
out the minimum measurement of the Rectangle (and October gap); prices then reacted. See sequel
in Figure 13.8.
201Chapter thirteen: Support and Resistance
Ranges. Additionally, many other stocks might be cited. (EN9: While the particular stocks are
dead or transmogrified, the princ


d their advance
at 24 1/2 and went into a three-month Rectangle. An upside breakout on January 10, 1946, carried
out the minimum measurement of the Rectangle (and October gap); prices then reacted. See sequel
in Figure 13.8.
201Chapter thirteen: Support and Resistance
Ranges. Additionally, many other stocks might be cited. (EN9: While the particular stocks are
dead or transmogrified, the principle is alive and well.)
Over long periods, however, such Support and Resistance Levels do tend to be gradually
modified, broadened, or “blurred” as new ones are created. One source of many important
new Supply Zones is a Bear Market Panic. For this is the one type of decline that can
be counted on to pay no heed whatsoever to previous underlying Support Zones. Panics
(which, as seen in our earlier study of Primary Swings in connection with Dow Theory,
typify the second phase of Bear Markets), once they get under way, seem to sweep away all
potential Support in their calamitous plunges until they exhaust themselves in a general
market Selling Climax for which may or may not come at a level that bears a relation to
some previously established Support. To use U.S. Steel again as an example, the 1937 Panic
Decline took the stock down through its 93–96 range, hesitated briefly at the 78–80 level,
and then plunged through 69–72 and 55–58 to stop just above 50. In the 1946 Panic, X again
broke swiftly through 78–80 and 69–72 to halt at 66.
When there is a large turnover at a Panic Bottom in any given stock, that level acquires
a strong “vested interest” for the future and will usually furnish conspicuous Resistance
to a subsequent advance (after another Bear Market Decline has taken quotations below
the Panic Level).
This discussion of Panics brings us back to a consideration of Support and Resistance
performance at other stages of the Primary Trend. Bearing in mind the relation of Resistance
to volume, it is easy to see why in a long drawn out but otherwise typical Bear Swing in
which trading interest diminishes to a very low ebb as the final low is approached, the next
YORK CORPORATION YOK1 946
APRILM AY JUNEJ ULYA UGUSTS EPTEMBER
26
24
22
20
19
18
17
16
Sales
100’s
50
40
30
20
10
6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28
Figure 13.8 The February reaction in Figure 13.7 met momentary Support at 24; prices bounced far
enough to close the February 7 gap and then broke down through the Rectangle Top-Line Support
technically a distinct warning. Then a Symmetrical Triangle formed, but the breakout came too
near the apex, produced only a rally to the former high, and then an “end run.” One did not need to
wait for the Double Top signal on August 22 to forecast a decline of more than minor consequence.
202 Technical Analysis of Stock Trends
to the last Intermediate Bottom may produce relatively little supply and, consequently, only
a small reaction when the new uptrend reaches its level. Add to this the fact that many of
the buyers in the last stages of a Major Decline are deliberate scale-down investors who
fully expect prices will go lower and, hence, are not easily shaken out. The slow progress
so often seen in the first part of a new Primary Bull Market is due not so much to overhead
Resistance as to lack of impatient public bidding.
The Recovery Trends that follow precipitous Bear Market Panics usually exhaust
themselves, for obvious reasons, long before they get back up to the last Resistance Level left
behind in that Primary Downswing (which is usually the Bottom of the first Intermediate
Decline from the extreme Top of the cycle), but they often meet supply at a lower Resistance
Zone set up in the preceding Bull Market . Look way back on your charts, therefore, when
sizing up the prospective advance in such situations.
A further thought along that line is this: there is no law that requires an advancing
trend to keep right on climbing until it reaches a distant overhead Supply Zone. It is true,
as a corollary that we have already mentioned to our Support and Resistance Theory, that
prices can and do rise easily through a price range at which no Bottoms or Congestion
Areas have formed in previous downtrends, but if the first established Resistance Level is
a long way above, the advance may exhaust itself before it gets there. Heavy supply may
come in for other reasons at a lower level. Think, then, of a distant Resistance Level as a
maximum possibility rather than as a certain goal. However, between two stocks whose
purchase you are considering, you should select the one, other things being equal, with
the “thinner” track overhead and can rise farther before it encounters a charted Supply
Zone.
Pattern Resistance
We can revert now to some of the Minor phenomena discussed in connection with Reversal
and Consolidation Patterns in earlier chapters. Take gaps, for instance. You will now see
why it is easy and, hence, quite in order for a reaction that comes soon after a gap has been
made to slip back and close that gap. There is no “vested interest” whatever in the range
through which prices skipped to form the gap on the chart. You will also see why such a
reaction may stop short and reverse as soon as it has closed the gap, provided there was a
high-volume turnover in the price range immediately preceding the gap. Such is usually
the case with a Breakaway Gap.
Any gap, for the same reason, is easy to close once a reaction starts prices moving back
in that direction, if it is not too far away and if there are no intervening Resistance Levels
to stop the reaction before it gets there. In the case of a Runaway Gap, however, there is no
reason why a reaction should halt as soon as it has covered the gap range; on the contrary,
it will probably continue on through the “thin” price track that preceded the gap.
Pullbacks and Throwbacks—the quick return moves that we noted as developing so
often shortly after a breakout from a


ce Levels
to stop the reaction before it gets there. In the case of a Runaway Gap, however, there is no
reason why a reaction should halt as soon as it has covered the gap range; on the contrary,
it will probably continue on through the “thin” price track that preceded the gap.
Pullbacks and Throwbacks—the quick return moves that we noted as developing so
often shortly after a breakout from a Head-and-Shoulders or other Area Pattern—exemplify
the principles of Support and Resistance. When prices break down, for example, out of a
Descending Triangle, the horizontal lower boundary of the formation, which was originally
a Demand Line, promptly reverses its role and becomes a Resistance Level. Any attempt to
put prices back up through it, therefore, after a decisive breakout, is stopped by supply at
or near the line. By the same token, the neckline of a Head-and-Shoulders Top, which was
a Demand Line, becomes a Resistance Level after it has been broken. The Top or Supply
Line of a Rectangle becomes a Support after prices have pushed above it on volume and
by a decisive margin.
203Chapter thirteen: Support an d Resistance
Earlier in this chapter, in our discussion of the three criteria for appraising the amount
of Resistance to be expected at a former Bottom level, we named “distance away” as one of
the criteria and stated as a general rule that prices should have gone at least 10% beyond
that level in a medium-priced stock before much Resistance would be set up. This 10%-away
rule does not apply in the case of a Throwback to a well-defined area formation when it
follows shortly after a breakout. All that is necessary to establish strong Resistance to such
moves at the pattern boundary is a conclusive breakout.
The Symmetrical Triangle has a different sort of Support and Resistance “field.” You
will recall that the first Reversal point in the formation of a Symmetrical Triangle (a Top,
if it forms on a rising trend, or a Bottom if on a decline) is normally accompanied by high
trading volume, but that activity diminishes rapidly on succeeding fluctuations within its
converging boundaries. Consequently, once prices have broken out of the Triangle and have
proceeded well beyond the level of the pattern’s first Reversal point, that level, because of
the volume of shares traded there, becomes a Support (or Resistance) against a subsequent
reaction. But, if the breakout move does not carry beyond the Triangle’s first Reversal Level
by a clear margin, any Throwback will probably bring quotations back to the extended
(sloping) pattern boundary. If the reaction does not occur until the trend has worked out
to or beyond the Triangle’s apex, then the Throwback usually will not meet Support (or
GOODYEAR TIRE GT 1945–1947
76
72
68
64
60
56
52
48
44
Sales
100’s
50
40
30
20
10
ND JF S
ON DJ FMM MAJ JA M A
Figure 13.9 We first discussed Pullbacks in connection with the Head-and-Shoulders in Chapter 6
and refer to them again in this chapter as Support–Resistance phenomena. At least one Pullback to
the neckline (after the breakout) occurs in the great majority of cases. Many Head-and-Shoulders
Formations produce two, the first within a few days after the breakout and before prices have gotten
very far away, and the second weeks later, sometimes after the minimum measurement of the Head-
and-Shoulders has been fulfilled. Goodyear saw the unusual number of four Pullbacks to its 1946
neckline in the first two weeks after the August breakout, another in October, a third in November,
and a fourth in February 1947 , which met the Double Resistance of the neckline and the down
trendline (see Chapter 14) projected from the 1946 April head and August right shoulder.
204 Technical Analysis of Stock Trends
INTERNATIONAL TEL. & TEL. IT
1945
JANUARYF EBRUARY MARCHA PRIL MAYJ UNE
30
28
26
24
22
20
19
Sales
100’s
500
400
300
200
100
6 13 20 27 3 10 17 24 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30
Figure 13.10 Several examples of the Support “field” of the Symmetrical Triangle appear in this 1945
daily chart of “IT.” Following the belated February 5 breakout from the first Triangle, prices returned
on the 9th to the level of the mid-January Top, but then suffered a more extensive reaction, which
came down on February 26 to the Triangle’s apex level. This was a critical juncture. The apex point
itself is a strong Support (or Resistance), but its level becomes weaker as time passes. In this case an
“end run” might have been developing. Stop-loss orders should always be entered under an apex
level (see Chapter 27). Here the apex held, however, and prices went into another “Coil,” breaking
out topside on March 10. Their next reaction was supported, as was to be expected after an early
breakout like this, at the Top Pattern Line. The price track from mid-March to the end of April fell
into an Ascending Triangle Pattern, the top boundary of which functioned as Support in June but
was broken in July. Refer to Figure 11.17 .
INTERLAKE IRONI K1 944
JULY AUGUST SEPTEMBERO CTOBER NOVEMBER DECEMBER
10
9
8
Sales
100’s
125
100
75
50
25
1 8 15 22 29 5 12 19 26 2 9 16 23 30 7 14 21 28 4 11 18 25 2 9 16 23
Figure 13.11 In this instance, a belated upside breakout (August 10) from a Symmetrical Triangle
failed quickly and the subsequent reaction, after holding for several days at the apex level, finally
broke down for an “end run.” Thereafter, note the apex level turned into a Resistance against
Recovery Moves.
205Chapter thirteen: Support and Resistance
Resistance) until it has carried back to the level of the apex, which, in brief, represents the
concentration level or axis of the Triangle’s Support and Resistance.
The intersection of the two converging boundary lines of a Symmetrical Triangle has
sometimes been called a “cradle.” The axis Support (or Resistance) is strongest near the
cradle point and gets weaker as the axis line (apex level) is extended out to the right on the
chart