The purpose of this Market Call section is to
educate readers in technical analysis patterns and indicators. As with all investment
information, you need to research information and consult your financial advisor before
initiating any strategies that are contained in Market Call.
Also, you must realize that as with all trading strategies,
opinions can change quickly depending on market conditions and developments.
This column tries to present historical examples, potential set
ups, and examples of entry and exit strategies.
Channel Breakouts
Channel Breakouts are a popular method of trading stocks. The
principal behind a Channel Breakout is that when a stock trades above the highest price or
below the lowest price in the last N (number of periods) number of periods, a new trend
may be starting to take place.
This channel trading method can be used in any number of periods
from minute bars to weekly time frames. The results of using such a method will often
result in a stock moving above a defined resistance or support area. When the top of the
channel is a new high, the moves can be explosive.
Let's look at Microsoft, MSFT
MSFT has been trading in a range of between 76 and 83 for the
past 8 weeks. Can MSFT break out of this trading range? Which way will it break?
One way to play a stock that has been in a range is to place
orders above and below the trading range. If MSFT breaks above 83 tomorrow, I would buy
the breakout and place a stop in the middle of the range.
An order would be "Buy MSFT 83 � Buy Stop."
If MSFT breaks and I Buy the stock, my expectation would be a
continued rise and a new up trend start in effect. As always, use stops on al trades. I
would place my stop at 80.
