The channel trade is a simple concept: either buy the breakout above resistance or sell the breakdown below support. When that channel range is compressed, it sets up the potential for a volatility squeeze, and it can energize a move and power profits.
There are three notable stocks with compressed Bollinger bandwidth that are trading in well-defined horizontal channels. When they break from their channel parameters, the respective moves could be volatile.
The first stock up is Disney (DIS) - Get Report . After it made a head and shoulders bottom in the beginning of the year, it began moving in a narrow sideways channel above a flat 50-day moving average at the $96 level and below resistance in the $100 area. Moving average convergence/divergence is also relatively flat and holding above its centerline, while the faster stochastic oscillator made a bullish crossover and has moved out of an oversold condition.
A similar dynamic is taking place on the money flow side. The longer averaged Chaikin money flow indicator is reflecting negative money flow during the consolidation phase, while the faster money flow index is preparing to cross above the intersection of it 21-period average and centerline.
The stock had a strong session on Wednesday and is currently retesting the channel top.
Under Armour (UA) - Get Report has a similar chart pattern and price and money flow momentum indications. It saw a strong bounce off its January bottom and then settled into a narrow horizontal trading range above its 50-day moving average and just below its 200-day average. The flat lines on the relative strength index and moving average convergence/divergence reflect the neutral price momentum, and Chaikin money flow reflects waning buying interest over the last month.
A morningstar pattern formed during this last test of channel support, which could quickly change the technical complexion. This is a three-day pattern that consists of a large dark candle, followed by a narrow opening and closing range "doji" candle and completed by a large white candle. It is a reversal formation that represents a transition from bearishness to bullishness.
Shares of Goldman Sachs (GS) - Get Report have been moving in a familiar pattern after making a double bottom in February, but there are differences in the technical indications. The relative strength index has moved up sharply, taking out its 21-period average and centerline. Daily moving average convergence/divergence is overlaid on a weekly histogram of the oscillator and is above its centerline on both timeframes. Chaikin money flow has been in positive territory since the channel parameters were established and suggests the stock is being accumulated in anticipation of higher prices.
The technical readings are important because they reflect the internal dynamic within the trading range, whether positive, negative or neutral, but it's the price action that initiates the trade. The buy trigger is an upper candle close above resistance, and the short trade is initiated by a lower candle close below support. It's a simple strategy that requires a close trailing stop.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.