Even with the S&P 500 rallying to new highs, a high quality entry and exit is still needed to capitalize on the uptrend in stocks. These strong trend channels provide a way in and a way out. Trend channels highlight the rhythmic movement of a stock's uptrend, making entry and exit points more visible. Risk is kept low, and the potential upside to the trades creates an attractive reward-to-risk tradeoff.
Boston Scientific (NYSE:BSX) is having a great year, more than doubling in price. Since April the price has been in a trend channel higher. Currently support--the "buy region--is between $12 and $11.80. Look to exit trades near the upper band of the channel, between $13.25 and $13.35. If the price falls below the channel that is an indication of a potential reversal. A stop loss order can be placed just below $11.35. $11.60 can also be used, but the odds of getting stopped out pre-maturely are slightly higher.
Discover Financial Services (NYSE:DFS) also began an uptrend tend channel in April. The price recently hit the upper band, setting a new high at $54.45. The lower band is the support and buy region, near $49.25 to $49. If support holds and the channel continues, the upside target is the $55. A stop can placed just below the prior low at $48.40.
Praxair (NYSE:PX) is currently testing the upper band of its trend channel, so an entry based on the channel will require a little patience. The stock just set a new high at $125.94. By the time the price pulls back, trend channel support is likely to be between $120 and $119 providing the buy area. A stop can be placed just below $117.50, and assuming the channel holds the target for the trade is $127 to $128.
3M (NYSE:MMM) has been rallying along with the S&P 500, creating a new high at $124.32. The upper channel band is near $125, therefore, it could be a couple weeks to a month before another buying opportunity comes along at the lower band. $119 to $118 is the most likely support region, and a stop can be placed below the recent low at $116.65. If the price pulls back to this region, and the channel holds, look for the price to extend toward $126 to $126.50.
The Bottom Line
Like all technical patterns, a trend channel will eventually break. While it lasts though it can be traded by simply entering near the lower band and exiting near the upper band. A stop should also be used to control risk. The price won't always reach the band, and sometimes it may overshoot it. Therefore, some flexibility is required in choosing an entry price and exit price. Both prices should be in the vicinity of the band, and the trade should offer an attractive reward-to-risk ratio.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.