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.

Related Articles
  1. Chart Advisor

    Trend Channel Bounce Trades

    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 ...
  2. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  3. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  4. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  5. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  6. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  7. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  8. Fundamental Analysis

    3 Long-Term Investing Strategies With Strong Track Records

    Learn why discipline and a statistically valid investment strategy can help an investor limit losses and beat the market over the long term.
  9. Chart Advisor

    These 3 ETFs Suggest Commodities Are Headed Lower (COMT,CCX,DBC)

    The charts of these three exchange traded funds suggest that commodities are stuck in a downtrend and it doesn't look like it will reverse any time soon.
  10. Chart Advisor

    3 Charts That Suggest Now Is The Time To Invest In Real Estate (VNQ, SPG,PSA)

    Real estate assets have some of the strongest uptrends around. We'll take a look at three candidates poised for a move higher.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  3. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  4. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  5. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  6. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center