Buying The Upward Trend Channel Bounce

By Cory Mitchell | May 15, 2013 AAA

The rhythmic price fluctuations of a trend channel provide great short-term trading opportunities, but can potentially turn into longer-term trades if the channel continues to rise. The channel provides a risk controlled trade with an easy-to-see exit point. These four stocks are moving higher within well-defined trend channels, and with the price very close to the lower bound of the channel a bounce means it could be time to buy. Here's how I'd set up the trades.

Rogers Communications (NYSE:RCI) began its trend channel back in summer of 2012, as the price ratcheted up from $33.58 to the recent April high at $51.98. The lower band of that channel is now intersecting near $48, very close to the May 7 close at $49.19. A push back above $49.80 signals the trend channel is holding and I'd expect the price to rally toward the upper band at $53. As long as the overall channel remains in tact though, that price target will rise over time. A stop-loss near $48.50 caps the risk and allows for a 2:1 or greater reward-to-risk ratio. If the price drops below $48.50, the overall uptrend is jeopardized.

SEE: Technical Analysis: Support And Resistance

Luxottica Group (NYSE:LUX) began channeling aggressively higher, relative to its prior movements, in November 2012. The lower channel band intersects near $51, not far off the May 7 close at $51.80. Ideally the price should rally above $52.50, indicating the channel has held and a move toward the top of the band of $56 is likely. The target rises over time as long as the channel stays intact. If the price drops below the May 2 low at $50.91, its a small warning sign that a larger correction may come, but primary support is at $49. Therefore, for short-term trades I am looking at a $50.85 stop, and for longer-term trades the trade can be given a bit more room with a stop at $49.

SEE: Interpreting Support And Resistance Zones

Reed Elsevier (NYSE:RUK) has also been moving in a channel since December 2012, but has a tendency to "overshoot" the main channel, making it a bit more of a wild card from a technical perspective. While the channel could be drawn a few different ways on this stock, I'm placing the lower band with an intersect currently near $45.25. As long as the price stays above the April 5 low at $45.18, I consider the channel to be holding and I like the long. If the price drops below that, there is potential for more downside and I'd leave it alone. Upside target is $49.20, but will creep higher as along as the channel remains unbroken.

SEE: Support & Resistance Basics

Since late 2012, PartnerRe (NYSE:PRE) has been channeling higher; the formation here is actually a wedge, as I've drawn it, as the channel lines are slightly converging. Support for the pattern is near $92, but the price looks to have already rallied off that level. The upside target is $97 to $98. A stop loss at $91.70, just below the recent low at $91.78, controls the risk and prevents further losses that could materialize if the price falls through that price.

The Bottom Line
Trend channels provide a highly visual way to trade. By re-drawing the pattern on your own charts you're able to monitor the price relative to the channel lines in real time. Ideally enter long positions near the low band of the channel, but only once the price begins to push higher off of it. Use stops and place them just outside the lower band, or below a recent low. Exit near the upper band as the price approaches it. Trends aren't a crystal ball though; just because the price moved within the channel before, doesn't mean it will continue to in the future. When strong trends persist, trading a trend channel gives you multiple opportunities to grab short-term profits as the trend ebbs and flows.

Charts courtesy of stockcharts.com

At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.

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