Trend Channel Bounce Trades

By Cory Mitchell | Updated August 28, 2013 AAA

These stocks are in strong upward trend channels, but are currently trading near the lower support line. If the channel holds, there is potential for "trend channel bounce trades," as the price rallies off support and heads back toward the top of the channel. Typically these trades are low risk, since the entry point is near the support line and stop-loss price.

Baxter International (NYSE:BAX) has been moving higher within a well defined trend channel since the start of the year. The lower channel line currently intersects near $68.75, although it looks like the stock may already be heading higher before reaching that level. On August 2 Baxter made an intra-day low of $69.31, before reversing course and closing August 6 at $72.03. The upper channel line intersects near $75, which is an area of likely resistance. The risk/reward on this trade isn't ideal given that the profit potential is about $3 and the risk is also about $3 if a stop is placed slightly below $69.31. Therefore, if already long there is likely more upside, but if you're looking to get long being patient and waiting for a bit of a pullback is likely the best option.



United Parcel Service (NYSE:UPS) started its current trend channel in February. The lower channel line is at $86, so I'd be looking to go long anywhere between $87.50 and $86, with a stop-loss order in the $85.50 area. The upper channel line intersects near $93, so the profit target for the trade is just below this. Other than a price surges in May and July though, the price action has been fairly sedate. Therefore, the price will need to breakout above $89.25 resistance in order to potentially reach the $93 target.



SEE: Target Prices: The Key To Sound Investing

Boeing (NYSE:BA) has been in a very strong advance since March, but is currently heading toward the lower part of the rising trend channel. Channel support is at $103.25, so entry between $103.25 and $105 is looking really good. I'd put a stop near $103 and a target near the upper channel line at $113



Interpublic Group (NYSE:IPG) isn't near it's lower channel line right now, but it looks to be heading there. Toward the end of July the stock broke higher out of the trend channel and then quickly reversed, indicating selling pressure near channel resistance. Therefore, a pullback toward $15, and channel support, is possible. I'd look to get in anywhere between $15 and $15.50 with a stop-loss just below $15. The target is the upper channel line and resistance just above $17.



SEE: Trading Is Timing

The Bottom Line
Trend channels highlight rhythmic movements in price. As long as the channel holds, these movements are exploitable by buying near the lower channel line and selling near the upper line. Channels don't last forever though, so a stop-loss order should be used to control risk. Also, it is recommended that you wait for the price to begin moving higher off the lower channel line before going long. This provides a little extra assurance that the support level has held and that the price will likely start to head back toward the upper channel line.

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

Charts courtesy of StockCharts.com.

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