Today’s action in the stock market was marked by a lengthy consolidation channel, with a mini-breakout into the close, leading to lower prices.

Let’s take a quick look not only what happened from a technical picture on the intraday chart, but let’s learn a lesson about channels.

This is a textbook example of a consolidation channel, marked by two virtually parallel trendlines. Don’t be surprised if you see a picture of today’s action in a technical analysis textbook soon.

Seriously, trendlines are formed by a minimum of two touches, but three touches or more are ideal. The more time price ‘tests’ (or touches) a trendline and reverses, the more valid the trendline becomes.

Eventually, all channels will break, but until then, odds favor trading with the trendline – in both directions if it is a channel trendline. Trading bi-directionally is more of an aggressive style, but would have worked well today. Generally, one tries to take trades in the direction of the prevailing trend, which in this case was down (as determined by lower highs, lower lows, and the most bearish moving average orientation possible).

It is often best to ignore momentum oscillators in range-bound markets, as well as ignoring most moving averages (though notice how the 50 period average served as resistance today).

Rangebound markets favor using bound oscillators such as the RSI or Stochastic.

In the next post, let’s look at the daily chart of where we stand in the market.