Channel Chart Pattern
A channel is two parallel support and resistance lines that contain prices. It is like the rectangle pattern, except for the rectangle occurs when the support and resistance parallel lines are horizontal; a channel's parallel lines either slope upward or downward. As is the case with the rectangle pattern, there should be at least two peaks creating the resistance line and should be at least two valleys creating the support line.

UpTrending Channel Sell Signal
A breakout occurs when prices breakout above the resistance line or breakout below the support line. For an up trending channel, typically a sell signal is given when prices break below the upward sloping support line.

DownTrending Channel Buy Signal
A breakout occurs when prices breakout above the resistance line or breakout below the support line. For an up trending channel, typically a sell signal is given when prices break below the upward sloping support line.

Internal Channel Buy and Sell Signals
Bulkowski (2005) suggests buying when prices hit support and sell when prices hit resistance in an upward sloping channel; however, he suggests not to short at resistance and buy to cover at support in an upward sloping channel, rather do that only in a down sloping channel; he also suggests getting out of trades that close above resistance or below support that is contrary to the direction a trader is expecting prices to move for the trade to be profitable.

Price Targets
Though Bulkowski (2005) did not calculate performance statistics on Price Channels, he feels that the performance should be very similar to Rectangle patterns.

Price Channel Uptrending Chart Example
The chart above of the Crude Oil ETN (OIL) shows an upward sloping channel with a support trendline created by four valleys and a resistance trendline created by three peaks. A sell signal is given when prices close beyond the upward sloping support trendline.

Price Channel Downtrending Chart Example
An example of a downward sloping channel is given above with the chart of the 20+ Year Treasury Bond ETF (TLT). The downward sloping resistance line is established by four peaks and the downward sloping support line is established by three valleys and a fourth that appears to be a false breakout downward. Once prices breakout above the downward resistance line, then a new uptrend begins that lasts for three peaks long.

Works Referenced
  • Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
  • Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
  • The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html
  • The Pattern Site. (2005). Bulkowski’s Channels . Retrieved June 1, 2012, from http://www.thepatternsite.com/channels.html

Source : FinVids.com