As traders, we use technincal analysis as a very reliable method for speculating on future price direction of both equities (shares) and indexes. Technical anyalysis in simple terms is the study of historic price movements in a share in search of patterns or consistantly traded support and resistance levels. Today we are looking at the ‘Channel’ formation on WPL.
Context: Lack of trend during the channel or trading range, but often proceeded by a trend.
Appearance: A channel is distinguishable by a trading range with prices bound by two parallel trend lines. The parallel trend lines connect the highs and lows, which form the area in which the stock is channeling. The upper trend line acts as resistance, and the lower trend line acts as support. The trading range may be wide or narrow, and is typically only broken with a high-volume thrust to new relative highs or lows. Confirmation of this pattern comes after there are at least two contact points with the upper trend line and two with the lower trend line.
Important note about channels: The more times the channel’s trend lines are validated (price touches them and retraces to the opposite direction), the stronger the pattern is.
Breakout Expectation: A breakout is usually confirmed when the price closes above or below the boundaries of the pattern. The strength of this breakout is often affected by the duration of the channel, the width of the channel, and the volume behind the breakout. It may be possible to trade the upward and downward movement in the channel using derivative products.
Example: The daily OHLC (open high low close) weekly chart below shows a channel on Westpac Bank (WBC) as indicated by the blue trend-lines containing the trending highs (resistance) and lows (support). The channel formation quickly becomes obvious on looking at the chart. Each time we have seen WBC fall to a level of support at around $27.60 it has changed direction and has then risen. Similarly, when the stock has risen to around $35.00 it has reversed, all over a period of around 4 years. You can see that the current is testing the support level; a trader could look at this as an opportunity to trade. If the level holds and shows a buy signal it could be a good opportunity to go long and if it breaks go short. Most traders will have system to establish confirmation of the support and entry into a trade.
There are many ways that you could trade this type of pattern as it moves from support to resistance within the channel formation. As a specialist in derivatives, we are able to profit on a stock when it falls as well as when it rises.
If you would like to find out more about this potential opportunity or would like to learn more about trading systems, please call Traders Circle on 03 80805788 and speak to one of our advisers.
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