The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

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the hAnDbook of teChnICAL AnALySIS

formation constitutes a rising channel. To draw a falling or declining channel, we
first draw a downtrend line based on two significant peaks, indicated at Points 4
and 5. We then draw a line parallel to the downtrend line from a significant trough,
indicated at Point 6, and project it downward. Notice that the trough at Point 6
has violated the uptrend line, which may be an early indication of a potential trend
change. We see the rising channel transitioning into a falling channel. (Please refer
to Chapter 13 for alternative approaches to constructing a price channel.)


nested Channels


Figure 5.45 shows Silver price transitions within a larger falling channel. We say
that the smaller channels are contained or nested within the larger channel. Chan-
nel nesting can occur at multiple levels, with large channels comprised of ever‐
decreasing channel sizes. In essence, channel nesting has fractal‐like properties.
Figure 5.46 depicts nested channeling on a chart of the USDCAD. Notice the
channels reacting at the Fibonacci retracements levels.


price target projection


Channels are extremely useful for projecting potential price targets. Figure 5.47
illustrates the use of the return line as a possible price target, providing resistance
to the motion of price. The price targets at Points 5 and 6 were forecasted accu-
rately via channel projection.


anticipating Channel breakouts


It also should be noted that if the subsequent price action fails to test either one of the
channel boundaries, it may be an early indication of a possible channel breakout in
the opposite direction of the failed price retest. A failure to test a channel bottom in an


figure 5.44 Channels and Channel Transitions.

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