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.

SEE: Interpreting Support And Resistance Zones

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.

Related Articles
  1. 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.
  2. 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.
  3. Chart Advisor

    Stocks With More Upside Due to Bear Traps (TAP, SPY)

    A bear trap is a pattern that typically leads to at least a short-term rise in prices. Here are stocks exhibiting the pattern.
  4. Active Trading Fundamentals

    New Traders: Trade the Market in 5 Steps

    New traders shouldn’t throw money at securities without knowing why prices move. Follow these five steps to tilt the odds in your favor.
  5. Chart Advisor

    Watch For a Bounce in These Emerging Markets (BRF, PEK)

    While downtrends are clearly in control of the direction of many emerging market ETFs, short-term indicators suggest a bounce higher could be in the cards.
  6. Investing Basics

    Valuation Models: Apple’s Stock Analysis With CAPM

    The capital asset pricing model, or the CAPM, estimates the expected return of an asset based on the systematic risk of the asset’s return.
  7. Stock Analysis

    Will "FANG" Stocks Outperform in 2016?

    Facebook held the most bullish accumulation-distribution pattern into year’s end, telling investors to focus on this issue in 2016.
  8. Chart Advisor

    Watch For Stock Breakouts Here

    Four stocks with potential breakouts across various time frames and pattern.
  9. Chart Advisor

    Stocks At Buy Points In Healthy Uptrends

    These stocks are in healthy long-term uptrends, and a recent pullback presents a buying opportunity.
  10. Chart Advisor

    The Uptrend Is Reversing In Financials

    Active traders are turning to financials because the close below several key long-term support levels suggest that the uptrend is about to reverse,
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