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A price channel is a continuation pattern that slopes up or down and the price trades in a range bound by an upper and lower trend line. The upper trend line is a resistance level while the lower trend line acts as support. Price channels that have a downward slope are considered bearish whereas channels that slope upward are seen as bullish.
The two trend lines that make up the formation of the price channel are the main trend line and the channel line. The main trend line determines the prevailing trend. For a bullish (bearish) price channel, the main trend line slopes upward (downward) and at least two reaction lows (highs) are used to draw it.
The second trend line is called the channel line and is parallel to the main trend line. The channel line will be based off reaction highs or lows as well. The channel line acts as resistance (support) in a bullish (bearish) price channel.
As the price continues to advance and fluctuate within the channel, the trend is considered bullish. The first sign of an imminent change in trend occurs when prices fall short of the channel line (or resistance). A subsequent break below the main trend line (or support) would provide the confirmation needed to signal a change in the current trend. On the other hand, a break above the channel line would be bullish and indicate continued price advances.
In the above example, the price started off in an up-trend and a bullish price channel was formed. During the price advance, trading never was able to break through the resistance formed by points A, C, and E (or channel line) but as long as the price did not break below support set by the main trend line at points B and D, the bullishness would remain due to the continued higher highs and higher lows. However, at point F, the support was broken and the ensuing sell-off began. A warning sign of the imminent sell-off can be seen just before point F when the price failed to reach the channel line, signalling an absence of continued buying pressure.
In contrast, as the price continues to decline and fluctuate within the channel, the trend is considered bearish. The first sign of an imminent change in trend occurs when prices fail to reach the channel line (or support). A subsequent break above the main trend line (or resistance) would provide the confirmation needed to signal a change in the current trend. On the other hand, a break below the channel line would be bearish and continued price declines.
In the above example, the price started off in a down-trend and a bearish price channel was formed. During the price decline, trading never was able to break through the support formed by points A and C (or channel line) but as long as the price did not break above the resistance set by the main trend line at points B and D, the bearishness would remain due to the continued lower highs and lower lows. However, at point F, the resistance was broken but it was not until point G that the price reversed course into an up-trend. A warning sign of the imminent trend reversal can be seen at point E when the price failed to reach the channel line, signalling an absence of continued selling pressure.
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