by Bob Stokes
Updated: January 11, 2019
Let's go "channeling."
No, I don't mean sitting on the couch in front of the television screen with a remote in your hand. I mean with stock market charts.
Here's an explanation from Frost & Prechter's book, Elliott Wave Principle:
A parallel trend channel typically marks the upper and lower boundaries of an impulse wave, often with dramatic precision [note: an impulse wave unfolds in the direction of the main trend, as opposed to a corrective wave]. You should draw one as early as possible to assist in determining wave targets and provide clues to the future development of trends.
The initial channeling technique for an impulse requires at least three reference points.
Both the upper and lower lines of a trend channel tend to serve as resistance or support.
In other words, in a bull market, when prices hit the upper channel line, they tend to reverse. When prices reach the lower channel line, they tend to bounce higher.
With what's been discussed in mind, take a look at this chart from the October 1 Elliott Wave Theorist, which showed the trend channels of both the S&P 500, which sported five reference points, and the DJIA, which sported six.
After mentioning both indexes, the Theorist noted:
Each of their highs on September 21 perfectly touched the upper channel line.
The implication was clear: expect a turn downward in both indexes.
Remarkably, Sept. 21 turned out to mark the all-time high in the S&P 500 with the DJIA reaching its record high just eight trading days later, on Oct. 3.
As you know, since those all-time highs were reached, the stock market has experienced a great deal of volatility. The S&P 500 and DJIA ended 2018 down 6.2% and 5.6%, respectively.
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