Stocks within trend channels hold several advantages, including being able to estimate likely support (stop levels) and profit targets (resistance). While there is no guarantee the trend channel will continue, while it lasts it can be profitable and a break of the trend channel indicates its end. The following stocks have all been moving higher within strong trend channels, some for several months and others for a lot longer. If the channel continues to the hold, the bounce-off support witnessed recently could mean the stocks move higher to test the upper band of the channel over the coming weeks and months.
SEE: Support & Resistance Basics
Macy's Inc (NYSE:M) has been moving higher in a strong trend since August of 2011 and has been within the current trend channel since December. The stock has been relatively strong compared to the market; Macy's is up 67.98% over the last year ($40.18 from $23.92) compared to the S&P 500 SPDRS (ARCA:SPY) ETF which is up 6.53% over the same time frame. If the stock drops below the trend channel, it warns of a further correction; currently, channel support is at $38.75. Support from the longer-term trend comes in at $35. By extending the channel out to the right, the approximate target for an upside move should the channel continue is $43.50 to $44 (this will increase over time as the line is sloped upward). The RSI indicator (14 day) has not been below 40 since September, signaling a strong advance; a drop below 40 has bearish implications. Pullbacks to 45 on the indicator have been buying opportunities and just below 70 has been the profit taking mark.
Moody's Corp (NYSE:MCO) has a similar chart to Macy's in that the trend higher began in August and it has been channeling since December. This stock has also been relatively strong compared to the S&P 500, up 20.37% over the last year. Trend channel support is at $39 with additional support at $37. If the current channel continues, the upside projection is $45.50 to $46. Like Macy's, the RSI (14 day) for Moody's has stayed above 40 throughout the advance, with pullbacks to the 42 or 43 area presenting great buying opportunities. A move below 40 on the RSI indicates the trend is at minimum weakening and potentially reversing. Profit taking has occurred as the stock has reached the 65 mark on the RSI.
Linear Technology Corp (Nasdaq:LLTC) has underperformed over the course of a year, but in the first part of 2012 it has picked up the pace and is up 9.26% to $33.15 from $30.34. Trend channel support is at $31.25, and, given the recent price action, a drop below that level is bearish. Some additional support is at $28.50. While the overall channel is higher, since February 2012 the stock been moving lower, unable to get close to or break through $35. This means there is still resistance overhead, but there's potential upside if it can clear the resistance. Two channels can be drawn, with the shorter one actually a diagonal or wedge - the price projection using that diagonal is very near the 52-week high at $35.30. If broken further, upside is possible into the other channel line at $36.50 to $37. RSI support in this stock has come in at 30 (signaling a slightly weaker trend) with profit taking opportunities as the indicator reaches 65 to 70.
InterActiveCorp (Nasdaq:IACI) has been moving in a trend channel higher since 2009. That long-standing trend channel provides support at $44, of which a drop below could see further downside materialize. Further support is at $40. The upside price projection can be based off a smaller channel, which began in October 2011, and also off the long-term channel. This provides two targets, one at $52.50 to $53 and a long-term target of $60 if the first target is exceeded. The RSI can be used as a confirmation tool in this stock as well. Since 2009 the 30 level has only been breached once, and if it occurs again it could be bearish long-term. Buying opportunities come in near 40 with profit taking at readings of 70 or slightly above.
SEE: Momentum And The Relative Strength Index
The Bottom Line
Trend channels provide a method of trading, as risk can be controlled using channel support, and price projections can be estimated by extending the channel out to the right. A break below the trend channel means stepping aside is recommended as it could mean a larger correction is underway. The RSI indicator can also be useful with trend channels as it too will move within a range as the trend unfolds, often presenting a buying opportunity near a certain reading and a profit taking opportunity at another.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.