Chart Pattern Analysis
■ (^) A long position at the standard uptrend line of support rather than at the re-
turn line in a rising channel
■ (^) A short position at the standard downtrend line of resistance rather than at
the return line in a falling channel
Channels are also particularly useful in helping define an Elliott wave. It is
much easier to visualize an Elliott wave when it can be circumscribed by a channel.
It is also not unusual to find bearish chart patterns within a falling channel and
bullish chart patterns with a rising channel. In Figure 13.55, we observe two
bearish head and shoulders formations within a falling channel followed by
a bullish broadening formation that led to an upside reversal, penetrating the
downtrend line.
The minimum price excursion associated with channels will be the one‐to‐one
price objective or target based in the height of the channel, projected from the
breakout level, irrespective of where the breakout occurs.
Volume should gradually subside as the channel develops and increase on
breakout. The longer it takes for a channel to unfold, the stronger and more per-
sistent will be its subsequent breakout. Horizontal channels are useful because
they provide numerous opportunities for buying low and selling high, as long as
price remains within the channel. This is popularly referred to as range trading.
It should be noted that once price fails to retest either the resistance or support
within a horizontal channel, it should be taken as an indication of a potential
breakout, in the direction opposite to the failed retest. See Figure 13.48.
In Figure 13.49, we see a rising channel meeting its minimum one‐to‐one price
objective. Notice the profit‐taking activity at that level, causing price to retrace.
We notice that price fails to test the channel support just prior to breaking to the
upside. This failure to retest tends to be an early indication of a bullish upside
breakout. Similarly, the failure to retest a resistance level tends to be an early indi-
cation of a bearish downside breakout.
In Figure 13.50, we see a rising channel meeting its minimum downside one‐
to‐one price target, on the four‐hour chart of EURUSD. As before, we tend to see
price reversing at the minimum target level.
In Figure 13.51, an uptrend line was drawn based on Points C and D, and a
return line projected from Point A. Notice how price reacted to the return line
figUre 13.48 A Horizontal Channel Providing Range Trading Opportunities.