Forecasting is mostly about extrapolating. And, channels are one of my favorite ways to extrapolate.
Would it take much of a leap of faith to assume the following scenario will work out?
Of course not. Even someone who knew nothing about investing might reasonably assume the target wouldn’t be that difficult to hit.
That’s about 90% of all there is to channels.
Sure, there are a few nuances. For instance, prices tend to move along in an oscillating range rather than a straight line.
Take this example from Jan – Feb 2012, that demonstrates how well they work…
And, even when they “stop” working, they frequently morph into a larger version of themselves. The purple channel is still there. It’s just part of something bigger.
When prices stay within channels, we can expect the prevailing trend to… well, prevail. When they depart, the results can be rather dramatic.
Channels rarely announce themselves. But, they often repeat previous channels — especially when it comes to slopes.
The white channel above, when examined in the bigger picture…
…isn’t all that unique. Note that it’s also part of a bigger channel, which is parallel to a channel from 2010-2011.
Taken together, similar sloping channels comprise a “channel system.”
Tracking the various systems often provides an excellent indication that a trend is continuing, or perhaps in the process of changing.
They aren’t always that easy to see. But, it rarely means they’re not there.
It usually means you haven’t looked hard enough.
Last, note that prices tend to bounce around between channel lines. The most important are the upper and lower bounds and the midline (usually drawn as a dashed line.) These are the lines that, when broken, tend to usher in big changes.
For charting purposes, I often refer to the “top” and “bottom” as the upper and lower bounds. For the various parallel lines in between the two bounds, I use Fibonacci levels as shown below, with the most important being the midline and the .236 and .786 lines.
The pattern of bounces within a channel quite often plays out as shown below.
And, it’s very common for a channel to form within the channel as shown below. In fact, the first thing I do when a channel breaks down is look to see if there’s another, larger channel that might take over going forward.