Intraday Channel Action

Mar 6, 2008: 5:27 PM CST

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.

3 Comments

3 Responses to “Intraday Channel Action”

  1. NTH Says:

    Hi again Corey,

    > This is a textbook example of a consolidation channel
    > Eventually, the line will break, but until then, odds favor trading with the trendline

    But is that true? ie: will the market break in the direction of the channel trendline on a regular basis? Have you backtested that or have a good reference for that from elsewhere?

    There was a similar channel on 4th Mar on DJIA but it broke to the upside, very agressively. Just an example.

    You may be right, but I think each time you make a claim that ‘odds favour xyz’, I think it needs to be backed up in some way. Maybe I missed that somewhere on a previous blog entry.

    As always, good luck with your trades,

    NTH.

  2. Corey Rosenbloom Says:

    Hey NTH,

    I was referring to trendline channels in general, and I changed the wording to make it clear that I wasn’t talking specifically about this trendline in that statement (it wasn’t clear before, admittedly).

    All channels do break, but we can never know in which direction they will break. We can only know that the market cannot channel forever, due to the price alternation principle. In other words, one of those two trendlines will fail, and price will often eject out of the channel. That’s not to say that it won’t return back, but generally a true break leads to continuation of the move.

    I’ll try to cite sources or past testing results when possible, and I agree that I need to document more statements more fully.

    I’m always trying to improve and am thankful for feedback!

  3. NTH Says:

    Hi Corey,

    > All channels do break, but we can never know in which direction they will break.

    I agree.

    Thanks for clarifying, I think thats helpful for your readers and your responses are appreciated.

    NTH