The Basics of Trading Channeling Stocks

Once you learn to recognize channeling stocks (a type of technical analysis), you can see that various trading opportunities exist at multiple points along the chart pattern for both long positions and short positions, and for various time frames.

The "Channel" is simply two or more parallel lines that you extend between points above a previous stock chart prices over a specific time period and below the same time periods stock chart prices.

A Channel does not always form, but there are quite a few times when they do. They can be horizontal or diagonal in direction.

The upper and lower lines create the channel because they act as support and resistance levels where the price has reversed from in the past.

This can happen over various time frames such as years, months, days, weeks, hours or minutes. By doing so, you can apply this technique to different trading strategies, whether Long Term Investing or Scalping.

Most charting programs will allow you to add lines directly to the charts and display the channel as you see it. This includes broker provided charting programs or online charting such as at StockCharts.com

Here are some additional pages I have to read about various types of Technical Analysis methods:


The first channeling stocks chart below is of Chesapeake Energy, ticker "CHK". I am showing this in particular because I remember back in 2005-2006 that CHK was trading in a horizontal Channel the whole year. Take a look:

Channeling Stocks 1

You can see that the stock moved between approx. $28 and $34 for over a year. As an example, once the pattern was noticed in May 2006, a Swing Trader could have bought near $28.00 on three separate times, and/or Shorted the stock near $34 several times.

(Note: Besides the longer term Channel that is visible on the chart above, notice the short term trading Channels that were formed at various times, such as: Late December 2005-February 2006; Late February 2006-May 2006; November 2006-December 2006. If you look even closer, additional channels can be seen as well. For the purpose of using the charts displayed I will be referring to the larger degree Channel illustrated by the lines I have drawn on the charts.)

When entering a trade expecting a reversal from a Channeling Pattern, you would use a stop loss at a point outside of the Channel because sometimes the price will move outside only to reverse quickly. (See November 2005; June 2006 and January 2007 as examples).


The next Channeling Stocks chart shows the same stock, "CHK", only this time from November 2008 up until today in May 2009. You can see that the same pattern occurred, only this time between $14 and $20. (I wonder if it is a coincidence that the price range of the channel was $6 both times.)

Channeling Stocks 2

The next Channeling Stocks chart below shows the Financial ETF, ticker "XLF" over the last 6 months up until today, May 15, 2009. Notice that from the March 2009 lows, the price has fluctuated between the two lines I placed on the chart.

Channeling Stocks 3

I have two more charts I want to show, the next one is of ticker "DIA", the Dow Jones Industrial Average Index ETF. You can see on this 2 year chart that I have drawn 4 white Channel lines (the green line is a resistance level I had previously drawn on the chart where I was expecting a pullback recently)

This example shows that you can observe Channels using multiple lines. It does not have to be only two lines. This also shows us that just because a price breaks through a line, doesn't mean it has to go on in that direction forever. Taking a look back over a longer time period will sometimes show previous resistance levels which form a larger degree channel to observe, and in this case a tradeable one.

Channeling Stocks 4

The charts above have shown tradeable Channeling Stocks over several months and in the case of the "DIA" chart, several years. The last chart below shows how this same technique can be used on an Intraday chart. It is a chart of Macys, ticker "M" from May 15, 2009.

Channeling Stocks 5

This page is already longer than I expected so I won't go on into much more detail here, but after taking a look at the above examples you can see that these Channeling Stocks do indeed provide tradeable opportunities to the trained eye. (Congratulations, you're now on your way to becoming an "Analyst")

Things to remember when learning to recognize Channeling Stocks:

  • A Channel can be over various different time frames.
  • The larger the degree of the recognized pattern, or time frame for the pattern, the longer term the trading opportunity in most cases, such as Swing Trading or Long Term Investing.
  • The Channel itself consists of parallel lines that each of us can draw on the charts.
  • The lines and prices will not always be exact, so allow a little price movement outside of the lines so you don't get stopped out too early on a fakeout.

As a final note, not only can these patterns be used for entry points, but you can also use the opposite line as an approx. target for an exit point as well.




Return From "Channeling Stocks" To "Technical Analysis"


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