Transforming Channels into Forecasts
In This Chapter
Getting to know channel drawing
Letting channels help you make money
Finding out about the regression channel
Distrusting the channel — pivot point support and resistance
Drawing a straight-line trendline and extending it out into the future suggests what the price may be in days to come. Actually, a trendline suggests only the general neighborhood of future prices. If the trendline is a support line, you expect the price not to fall below it, but that doesn’t tell you anything about how high it may go. With a linear regression line, you expect future prices to cluster around the line, but some outliers are always possible. In short, common sense tells you that you can’t forecast future prices to the penny.
While nobody can create a pinpoint forecast, we can forecast the range of probable future prices. Range refers to the same high-low range of the price bar described in Chapters 6 through 8, only encompassing a larger number of price bars in a series — weeks and months rather than only a few days.
In this chapter, I describe the straight-line channel and its forecasting capabilities. I show you two ways to build a straight-line channel forecast and outline how to interpret the information you see on the chart. I also talk about using pivot point analysis to draw horizontal support and resistance, for use either in nondirectional situations or with trend channels.
Diving into Channel-Drawing ...