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. I like to use the 20 period as my N periods. 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 Waste Management Inc, WMI.
Looking at the chart below, you can see that the company had some
negative news come out about the stock. In this case it was a earnings warning on July 7.
I am not a bottom picker, however, there are sometimes
overreactions to bad news. One way to play these debacles is to let the stock bounce
around for a few days, then wait for a channel breakout of the highest highs of the last
20 periods that you are trading.
Today, July 14, 1999, WMI broke above 35 on higher volume. This
can signal a breakout and a move to the upside. I would Buy WMI here. I would place my
stop at 34.
