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 doesn’t. 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 a breakout today in Earthlink Networks, ELNK
ELNK has been stepping up from channels over the past 4 weeks. On
July 8, 1999, ELNK once again broke a channel high at 67 �. ELNK continued higher from
this breakout and moved higher all day. This breakout can also be seen very clearly on a
daily chart.
This breakout is not only the highest high on the past month, but
today's action breaks a resistance are going back to the beginning of May.
I would Buy ELNK here. The stock should continue to move higher
from this break immediately. I would place a stop at 66.
