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Written and copyright © 2009-2011 by Thomas N. Bulkowski. All rights reserved.
This tutorial discusses drawing a channel when you only have three price turning points. Sometimes, the future price action will follow these channel lines, and you can use them to
determine when the trend is going to change (price bounces off the channel line).
Inspiration for this article came from Erik in an email. He asked about the following paragraph from my book,
Getting Started in Chart Patterns  , page 29.
"When price pierces a downsloping trendline and makes a higher peak (note: this is the second, higher peak), connect the two peaks with an upsloping trendline. Then draw
a new line parallel to the original trendline starting at the low between the two peaks. The lower trendline shows where price is likely to reverse."
I call this a three point channel.
Drawing Up-Sloping Channels
Let us apply the technique to the Dow industrials (^DJI), which I show on the daily chart.
I drew a blue trendline along the peaks. Peak A appears, piercing the down-sloping trendline. Then price
reverses to form a bottom at C followed by a second peak, higher than A at B.
If you draw a line connecting A and B, you get an up-sloping trendline. This outlines the new direction price
is expected to take.
Draw another line connecting valley C and parallel to the A-B line. This new line, which I show
as line C-D, except extended into the future, forms the bottom of a channel. Price is expected to touch the bottom of the channel, and it does at D,
reversing there.
This technique of drawing a channel with only three points, A, B, , and C works when the new price action
follows a trend, which is rare. Although it does not always work, it can give you a jump on where price is expected to turn.
Drawing Down-Sloping Channels
Three point channels also work for up-sloping trends, too. Reference the ideal situation as depicted in the chart on the left.
- Draw an up-sloping trendline along the valleys which I show as line D-E.
- Look for price to pierce the trendline, moving lower and forming a valley at A.
- Price recovers and forms a peak at C.
- Price drops to a new low at B, below A.
- Draw the A-B trendline.
- Draw another trendline parallel to A-B, touching peak C.
The next bounce upward may touch the top channel trendline if all goes according to plan. Adjust the trendlines as future price movement dictates.
-- Thomas Bulkowski
Written and copyright © 2009-2011 by Thomas N. Bulkowski. All rights reserved. Support mental health or I'll kill you!
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