Descending Channel - Descending Channel Pattern
Descending channel patterns are short-term bearish in that a stock moves lower
within a descending channel, but they often form within longer-term uptrends as
continuation patterns. The descending channel pattern is often followed by
higher prices, but only after an upside penetration of the upper trend line.
The stock will continue channeling downward until it is able to break either the
upper or lower trend line. An upside break is bullish, while a downside
break is bearish.
Context: Often found within an
uptrend, but up close appears to be a
minor
downtrend.
Appearance: This is a
channeling stock with a downward tilt. The
stock's price action is controlled by two parallel trend lines. Above the
stock is the primary descending trend line which
connects consecutive lower highs. Beneath the stock is a secondary
trend line, which also is descending as it connects consecutive lower lows.
Price follows the path of least resistance in a descending channel, which is
down. Upon reaching the lower trend line, the stock bounces until it
reaches the upper trend line, which acts as resistance. Trading a
descending channel in the most effective way is by waiting for an upside
breakout to occur before entering.
Breakout Expectation: Channeling stocks within descending channels are
only able to reverse course with an upside penetration of the primary descending
trend line. The strength of this breakout, the duration of the channel,
and the width of the channel will determine how far a breakout may carry.
A downside breakout from a descending channel indicates a higher intensity of
selling, and is a sell or short sell signal.
This stock formed a descending channel
within its uptrend. This was a narrow channel with a strong breakout on
heavy volume, and the move carried the stock much higher in just a few trading
days.
Be sure to learn about other
channeling stock patterns such as the
ascending channel and the
rectangle pattern.
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