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 Analysis 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: Cimic Group LTD/ CIM
Cimic has been channeling for roughly a month now, between resistance at $48.50 and support at $45.00. As you can see from the below chart, the share price has reversed once bouncing of the channel lines and stayed in-between resistance and support. With the share price changeling for the last month, and the fact our resistance level is further validated by being an old support level, I would expect the share price to stay between the two levels for the short term, or till significant news comes out for Cimic. As you can see, historically this stock likes to channel. Indeed, back in July it channeled for three months before moving slightly higher and continue another short-term channel.
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.
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