Welcome to Bravechart. Your in-depth article on chart analysis from a Scotsman stationed in the Outback.
As traders, we use technical analysis as a 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 chart in search of patterns or consistently traded support and resistance levels. Today we are looking at a specific chart pattern that falls under continuation patterns, the Channel.
Appearance: A channel pattern comprises of:
- A strong resistance level the stock has reversed from.
- A strong support level where the stock has moved bullish after touching or getting close to.
- A mid to long term period where the stock has channeled between the resistance and support levels.
Continuation Pattern: The Channel Pattern is one of the most common continuation patterns you will see when looking at a sideways market. You can see that when the stock hits that key resistance level, the share price moves down to start looking bullish. Once it has hit its support level, it usually changes to bullish straight away.
Important Note: To time this pattern correctly usually takes a little while since you will need the support and resistance levels to be confirmed before you can have a clear view that the stock is stuck between the channel lines. If the levels are not confirmed, the price level may just be taking a breather before heading in either the long-term trend line, or a breakout to the opposite direction.
Example: Woodside Petroleum Limited (WPL)
WPL, as can be seen below, has been channelling in a $3.50 channel for the last four months. As can be see, the resistance was formed back in in the middle of February and has stayed true with WPL going on a bull run in the middle of May. With the resistance holding and the support level being tested multiple times throughout this period, WPL is clearly trading in a channel between $34.00 and $37.50. With the recent test of the support level reversing and turning bullish again, it is looking likely that we will push higher to test the resistance level once again. The real test for this stock will come when the share price either breaks the support or the resistance level and a new pattern is formed.
There are many ways that you could take advantage of these patterns. 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 learn how to pick a stocks direction, then Join us at our live face to face one day “Technical Analysis, Picking the Direction of a Stock” course.
Contact us today on 03 8080 5788.
Regards,
Your Friendly Kilted Advisor,
Benjamin Farkas