Four Trend Channel Trades

By Cory Mitchell | December 11, 2013 AAA

With the market still in an uptrend, these stocks are moving within a channel presenting tradable opportunities. A trend channel is when the price moves back and forth between defined support and resistance, but making overall progress in one direction. These stocks have been trending higher, and while there is no guarantee theses stocks will continue to trade within the channel, while the channel lasts there are opportunities present.

BT Group (NYSE:BT) put in a 52-week high late in November right near the top of the trend channel, and since then has been moving sideways. The sideways movement has brought the price quite close the lower trend channel line. One way to trade this is with an entry between $60 and $59, a stop just below $58 and a target in the $63.50 to $64 area. If the price moves outside the channel on a lateral move, it isn't a concern. Several other lateral movements in the past have pierced the channel and it still continued. Only if the price breaches a former low (where the stop is) and is outside the channel is channel likely failing.

United Therapeutics (Nasdaq:UTHR) has been very strong all year. Following a quick pullback from a recent high at $95.23, the price just brushed the lower trendline which looks to have provided support once again. One strategy is to buy between $91 and $90, if the stock provides the opportunity, with a stop just below $87.50. Since we are assuming the trend will continue, the target is $98.50 to $99, or near the upper trendline when the price approaches it.

Pentair (NYSE:PNR), on the other hand, is currently testing the top of its trend channel. While it's possible the price could pop above the channel, typically taking profits near the upper band has been prudent as a short-term pullback usually follows. When the prices pulls back the likely buying area is going to be between $69 and $68. Depending on how long it takes, this may vary slightly, but the buying regions remains near the lower band. The stop is just above $66, and the target is near $74 to $75, or near the upper band when the price approaches it. This trade will take some patience, both waiting for the entry and then waiting for the trade to progress.

StanCorp Financial (NYSE:SFG) is also near the top of its channel, putting in a recent high of $65.30 on December 2.Currently trading near the top of the channel shows it is a market leader, and has remained strong despite of the minor pullback seen in the S&P 500 earlier this week. Therefore, picking up this stock near $62, with a stop at $58.50, provides a target near $68. The price is moving horizontally toward the lower channel line, so once in a trade and the price starts moving higher again (if, it moves higher), the stop can be moved up to just below the recent low. This trade will require patience, and by the time the price reaches the lower band, followed by the upper band, the entry points and targets may need to be adjusted slightly.

The Bottom Line

Trend channels provide a way to spot potential buying and selling opportunities. Buying near the low of the channel with a stop below a recent low, and taking profit near the top of the channel often provides an adequate risk to reward ratio. Like any method, trading trend channels isn't a perfect strategy. The price may break out of the channel only to move back in a short time later, likely causing loss, and eventually the trend channel will break definitively as the price changes direction. Trend channels don't provide exact entry or exit points, therefore, some other form or analysis is typically required for isolating when to get in and out.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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