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 the Channel Pattern.
A Channel Pattern is comprised of:
- A strong resistance level the stock has reversed from.
- A strong support level where the stock has become bullish after touching or getting close to.
- A mid to long term period where the stock has bounced between the resistance and support levels.
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 a key resistance level, the share price moves down to start looking bearish. Conversely, once it hits the key support level, it flips to bullish straight away.
Important Note: Timing 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 key 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: Channel Pattern on Aurizon Holdings Ltd (AZJ)
In this example, AZJ has been channeling in a 35-cent range for a few months. As can be seen, the resistance was formed in the middle of August and has held ever since. With the resistance holding and the support level being tested a couple of times throughout this period – most recently on the 26th of August – AZJ is clearly trading in a channel between $5.70 and roughly $6.05. With the test of the resistance level reversing and turning bearish again, and the fact gold has been falling once more, it is looking likely that the stock will continue to push lower. If we can see further bearish movement, $5.59 becomes the next target to the downside.
There are many ways that you could take advantage of these patterns. As a specialist in derivatives, we can use tools to profit on a stock when it falls as well as when it rises, or even when it goes sideways.
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