Channels
You can stay in the groove with a channel.
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The Horizontal Channel
The horizontal channel is either a reversal or continuation pattern, but it's impossible to tell which until the pattern is completed with a breakout, either down or up. The pattern is similar to the head and shoulders pattern. Notice that the volume decreased gradually over the span of the pattern, a characteristic common to triangles and head and shoulders patterns as well as to horizontal channels.
As in triangles, the breakout can occur to the upside or to the downside. But the upside breakout has to be accompanied by a solid increase in volume. If the volume isn't impressive, relative to the previous days or weeks of trading, the breakout is suspect.
For a downside breakout, the volume doesn't have to be heavy. There will likely be an initial surge in volume as traders sell their shares, anticipating a decline, but prices generally tend to fall of their own weight. In other words, there will likely be sellers, but not likely many buyers.
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An expected price move after a breakout from a channel can be measured by the distance from the lower channel line to the upper channel line. This is the minimum expected distance for the price move, though you can't usually predict how long it will take to happen. Chances are good, however, that eventually the price will reach its target, whether up or down.
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The Sloping Channel
The sloping channel is similar to the horizontal channel in that prices tend to stay between the two parallel lines -- but now of course the price is trending higher (or lower). When prices move into the channel, there's no telling at first what pattern is developing. Once you get a succession of highs above highs and lows above lows, you can draw up-sloping lines, one across the lows and one across the highs. The volume, meanwhile, should increase gradually as prices move higher, showing a growing interest in the stock. Also, the volume should recede with each price correction to an up move.
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