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 below a defined support area.
I feel that with any pattern, indicator, or strategy, the key is
to recognize when it works and when it does not. A pattern or indicator tested over a long
period of time may only have a 50-50 chance of working out in a trader’s favor.
A key to successful trading is to limit losses with stops and recognize when the pattern
or indicator did not perform as expected.
Let's look at Novellus Systems, NVLS
Looking at the chart below, it is clear that there has been
support in NVLS at 64 that goes back to the June 14 breakout to the upside. The action of
June 23 and 24 has brought NVLS into Sell signals from a Moving Average basis and from a
MACD and Momentum indicator.
What does it mean when a stock breaks support? In this case it
means that everyone who bought NVLS since June 14 is now losing money. These moves can
accelerate as traders and investors dump their shares.
I would exit long positions in NVLS. An aggressive trade may want
to consider a short position in NVLS at this time. I would place a stop on any short at 66
5/8.
