Trendline and Channel Tutorial: Part 4
All traders are different but I personally find it difficult to use standalone channels to consistently initiate profitable trades against. Not the least of the problem is that the channel continues to either rise or fall, making a secure place to hide a stop above/below more difficult.
But I find them particularly useful in three aspects. The first, and by far the most important, is that a channel allows one to quickly visualize the ebb and flow of supply and demand. As described earlier in this series, the relationship of price to the channel boundaries and the median line offer insight to the strength of the underlying trend (increasing or decreasing). The second is in the use of channels to rebalance existing positions against. I find tremendous value in trading around conjunctions with other support/resistance techniques. In other words, zones of support or resistance provided by the confluence of channels, horizonal patterns, fibonocci, momentum, and chart patterns result in more reliable entries than simply trading the width of the channels. In this piece we concentrate on finding suitable trading confluences.
Finding a confluence:
After the late March 2022 pivot (point A), the initial supply line A-C could be drawn along with a parallel initial projected oversold line from point B.
By early August the channel top (supply line) intersected price in the area around 4330. In the Wyckoff perspective, the downtrend represented the stride of supply and represented a significant chart reference.
In late May, price exceeded the initial projected oversold line, requiring a redraw from point D.
Between early Jan and mid July 2022 SPX declined from 4797 (A) to 3640 (D). The .618% retracement of the entire decline bisects around 4313.
From the low (1) on July 14, SPX rallied for 22 trading days. From July 26th an initial demand (uptrend line) could be projected. By the 29th an initial supply line (channel top) could be drawn. These two lines defined the minor channel.
By the middle of August, the minor channel intersected with the major channel in the area around 4332.
Price was also scraping across the top of the rising Bollinger band and the daily stochastic oscillator had been pinned in overbought since early August.
Levels:
4330 - Major channel top
4313 - .618% Fibonacci retracement
4336 - Upper channel (supply) line in the shorter perspective channel.
4332 - Bollinger Band top
Stochastic and other momentum indicators pinned in overbought.
As price moves into a confluence zone, I typically move to the chart of one lower degree and begin monitoring for a potential trade entry setup.
SPX Hourly:
In this perspective the channel becomes clearer. It is important to note that after August 8th, price never again approached the supply line and instead hugged the median line (inside the oval). This offered a clear indication of waning demand.
On August 11, I moved the supply line (red dashed channel top) lower, providing yet another layer of resistance.
Once price moves into a resistance confluence you may use your preferred method of trade entry and stop placement to initiate a trade.
Finally, most price action is only noise and there are only a few points on any chart where behavior becomes meaningful. Confluences, channel tops and trend lines represent one of instances. If no confluence exists, move your attention to a different chart. There is always a tradable confluence somewhere.
And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Taylor Financial Communications
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
But I find them particularly useful in three aspects. The first, and by far the most important, is that a channel allows one to quickly visualize the ebb and flow of supply and demand. As described earlier in this series, the relationship of price to the channel boundaries and the median line offer insight to the strength of the underlying trend (increasing or decreasing). The second is in the use of channels to rebalance existing positions against. I find tremendous value in trading around conjunctions with other support/resistance techniques. In other words, zones of support or resistance provided by the confluence of channels, horizonal patterns, fibonocci, momentum, and chart patterns result in more reliable entries than simply trading the width of the channels. In this piece we concentrate on finding suitable trading confluences.
Finding a confluence:
After the late March 2022 pivot (point A), the initial supply line A-C could be drawn along with a parallel initial projected oversold line from point B.
By early August the channel top (supply line) intersected price in the area around 4330. In the Wyckoff perspective, the downtrend represented the stride of supply and represented a significant chart reference.
In late May, price exceeded the initial projected oversold line, requiring a redraw from point D.
Between early Jan and mid July 2022 SPX declined from 4797 (A) to 3640 (D). The .618% retracement of the entire decline bisects around 4313.
From the low (1) on July 14, SPX rallied for 22 trading days. From July 26th an initial demand (uptrend line) could be projected. By the 29th an initial supply line (channel top) could be drawn. These two lines defined the minor channel.
By the middle of August, the minor channel intersected with the major channel in the area around 4332.
Price was also scraping across the top of the rising Bollinger band and the daily stochastic oscillator had been pinned in overbought since early August.
Levels:
4330 - Major channel top
4313 - .618% Fibonacci retracement
4336 - Upper channel (supply) line in the shorter perspective channel.
4332 - Bollinger Band top
Stochastic and other momentum indicators pinned in overbought.
As price moves into a confluence zone, I typically move to the chart of one lower degree and begin monitoring for a potential trade entry setup.
SPX Hourly:
In this perspective the channel becomes clearer. It is important to note that after August 8th, price never again approached the supply line and instead hugged the median line (inside the oval). This offered a clear indication of waning demand.
On August 11, I moved the supply line (red dashed channel top) lower, providing yet another layer of resistance.
Once price moves into a resistance confluence you may use your preferred method of trade entry and stop placement to initiate a trade.
Finally, most price action is only noise and there are only a few points on any chart where behavior becomes meaningful. Confluences, channel tops and trend lines represent one of instances. If no confluence exists, move your attention to a different chart. There is always a tradable confluence somewhere.
And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Taylor Financial Communications
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
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