The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
Channel Breakouts
Channel Breakouts are a popular method of trading stocks. The principal
behind a Channel Breakout is that when a stock trades above the highest
price or below the lowest price in the last N (number of periods) number of
periods, a new trend may be starting to take place.
This channel trading method can be used in any number of periods from
minute bars to weekly time frames.
The results of using such a method will often result in a stock moving
above a defined resistance or below a defined support area.
I feel that with any pattern, indicator, or strategy, the key is to
recognize when it works and when it doesn’t. A pattern or indicator
tested over a long period of time may only have a 50-50 chance of working
out in a trader’s favor. A key to successful trading is to limit
losses with stops and recognize when the pattern or indicator did not
perform as expected.
When a breakout occurs to New Highs, the move can be the start of a new
major move or the continuation of a stock that is breaking New Highs.
Remember that if you want your stock to double, it has to be making new
highs often.
Let's look at MCI Worldcom (NASDAQ: WCOM)
After hitting new highs, it is not unusual to see a stock consolidate
before moving higher.
After a huge advance in late October, WCOM for the past few weeks, has been
trading in a range between 84 and 88. This channel has been in effect since
late October.
Today, November 15, 1999, WCOM broke above the 88 level, which was the
resistance area.
