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.
I like to use the 20 period as my N periods.
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.
Let's look at Apple Computer (NASDAQ: AAPL).
Looking at the chart below, AAPL has been trading in a very narrow range.
You can see that every time AAPL traded down to 88 7/8, buyers came into
the market.
You can also see that every time over the past few days AAPL traded up to
93, sellers came into the market.
How will this resolve? I do not know, but I know what I am going to do when
this channel resolves itself.
If AAPL breaks above 93, I would buy.
If AAPL breaks below 88 7/8, I would short the stock.
