Chapter 14
Trend Channel Lines
In a bull or bear channel, the trend channel line is on the opposite side of the price action from the trend line and has the same general slope. In a bull trend, a trend line is below the lows and a trend channel line is above the highs, and both are rising up and to the right. A trend channel line is a useful tool for fading a trend that has gone too far, too fast. Look for an overshoot that reverses, especially if it is the second penetration that is reversing.
A trend channel can have roughly parallel lines, or the lines can be convergent or divergent. When they converge and the channel is rising or falling, the channel is a wedge and this often sets up a reversal trade. In general, any channel that is sloping up to the right can be thought of as a bear flag and it is likely that there will be a breakout through the bottom of the channel. The breakout can lead to a trend reversal or to a trading range that can break out to the upside or the downside. Sometimes the market will accelerate to the upside and break out of the top of the channel. When this happens, it is usually a climactic rally that leads to a reversal back into and often through the bottom of the channel, but sometimes it can be the start of another leg up in an even stronger bull trend.
Similarly, a channel that slopes down to the right can be thought of as a bull flag and the market will likely break out of the channel to the upside. This can be the start of a trend reversal or ...
