IBM Charts: A Good Channel Trade - TheStreet

IBM Charts: A Good Channel Trade

IBM is confirmed sideways, making for a good channel trade in which you buy toward the bottom of the trading channel and sell toward the top.
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By L.A. Little of tatoday.com, author of Trade Like the Little Guy.

Let's take a look at a stock that is

confirmed sideways

on all three time frames. A stock with those attributes usually makes for a good channel trade, a setup in which you buy toward the bottom of the trading channel and sell toward the top. That stock is

IBM

(IBM) - Get Report

.

On a long-term chart, there was a recent break of the all-time highs but it didn't come on expanding volume.

That made the breakout suspicious. True to form, the breakout didn't hold and the stock has come back under that breakout area now.

That has put the stock into a confirmed sideways trend with support at the $112 to $115 area.

Switching to the intermediate-term view, we can see that the support zone shown on the monthly chart is also apparent on the weekly chart. That gives you greater confidence that it is strong support.

On this chart, we also can begin to see that the top end of the channel has formed around $128 to $131. Thus, the bottom to top of the channel is about $15 or roughly 10%. That's tradeable.

Since the channel has just begun to form, if you want to trade IBM, what you should do is set alarms for yourself toward the top and bottom of this developing channel. The best time to trade a pattern is when it has just begun to form, because at the beginning the support and resistance areas are the strongest. Once they have been hit two or three times, they become weaker and more susceptible to a break.

IBM is setting up for some nice trading. With the market finally taking a spill last week, if we see a bounce this week in IBM, the short side will be appealing. If it heads straight down, that will work as well, as the support is strong and can be bought for a trade. That's the nice part of a channel trade: Both sides work for a while.

So until next time, keep trading the charts!

At the time of publication, Little had no positions in the stocks mentioned, though positions can change at any time.

L.A. Little, author, professional trader and money manager, writes daily on

www.tatoday.com

, a free educational site for traders and investors. He has been featured in numerous publications and is the author of

Trade Like The Little Guy

.

His background includes degrees in philosophy, computer science, computer information systems and telecommunications. With a trading philosophy centered on capital protection first and the accumulation of consistent gains over time, L.A. espouses a simplistic technical approach to trading the markets that is a throwback to the days of past. With a focus on swing points and the qualification of trends, L.A. provides a breath of fresh air to an otherwise crowded room of derivative indicators with the emphasis on technical minutiae.