Congestion forms when prices move within a narrow horizontal range over two or more days, creating a Congestion Support and Resistance (S&R) zone. The narrower and longer the congestion zone, the more significant its implications. If this new congestion aligns with an older congestion at roughly the same levels, its significance increases further.
(Fig 1.1 - Congestion S&R)
To identify these zones, mark the upper and lower boundaries by drawing horizontal lines. As price action approaches a congestion zone from below (or above), it typically pierces the lower (or upper) boundary, encounters resistance (or support) within the zone, and then reverses, triggering a strong move in the opposite direction.
A reversal candlestick pattern forming within the congestion zone offers strong confirmation of a reversal. Conversely, if the price after piercing one of the boundaries is powerful enough to overcome the congestion and closes beyond the other extreme, it signals a continuation in the same direction.
Congestion S&R zones are similar to horizontal channels, as both are contained within two parallel horizontal lines. However, the key difference lies in the width of these channels. Congestion zones are much narrower, making them more powerful. The width of the horizontal channel should always be considered in the context of the overall volatility of the commodity's price action.
We provide examples of both Commodity and Nifty below.
EXAMPLES
In the first chart example from a Natural Gas 2-hour (2H) chart, observe the large oval-shaped highlight indicating a narrow congestion zone forming over 4 days. The narrower and longer the congestion, the more significant its implications.
During the subsequent days, the price rises to the midpoint of the congestion zone at least four times but reverses each time, forming strong reversal patterns such as a bearish engulfing or a reverse hammer. This highlights the power of well-defined congestion zones in predicting price action.
(Fig 1.2 - Congestion S&R on Natural Gas Futures)
Consider another example, this time from a Copper 2-hour (2H) chart. Here, we see a matching congestion zone forming over several days, aligning with a prior congestion at the same level. This alignment serves as additional confirmation of strong support.
In the subsequent days, the price action tests the congestion zone by piercing the top boundary but reverses strongly on each occasion. This repeated reversal underscores the robustness of the congestion zone as a support level.
(Fig 1.3 - Congestion S&R on Copper Futures)
The last example is from the Nifty Futures 2-hour (2H) chart. Between December 6th and 13th, 2023, a tight congestion zone formed, 170 points wide and lasting six days. This zone was particularly significant due to its narrow width and prolonged duration.
On the seventh day, the price gapped up, initiating a strong rally over the following days, underscoring the congestion's strength. By the eleventh day, the price dropped back near the congestion zone and opened with a gap down within the zone the next day. As anticipated, the zone provided robust support, and the first candle reversed sharply, forming a piercing pattern. This marked the beginning of a powerful, sustained bullish move.
(Fig 1.4 - Congestion S&R on Nifty Futures)
Please click on "Next Post" to move to Gap S&R.
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