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CHANNEL LINES


Mighty Martha Stewart Omnimedia

12/21/04 02:04:17 PM
by David Penn

The same kind of resistance-turned-support in a trend channel that has carried the S&P 500 higher has also benefited MSO.

Security:   MSO
Position:   N/A

In a recent Traders.com Advantage article, I talked about the way that resistance at the upper boundary of a trend channel can often turn into support once that upper boundary is penetrated ("Testing The Channel"). I have been impressed with trend channels for several months, ever since a colleague here at Technical Analysis first pointed them out to me in a chart of a stock she'd purchased.

This chart of Martha Stewart Omnimedia (MSO) is another example of how helpful trend channels can be (Figure 1). I've drawn the trend channel by establishing a support line connecting the lows, then creating a parallel trendline and moving it to a point where it appears to have provided resistance.

Figure 1: Martha Stewart Omnimedia. The same kind of resistance-turned-support in a trend channel that has carried the S&P 500 higher has also benefited MSO.
Graphic provided by: Prophet Financial, Inc.
 
There was a temporary break about the upper boundary of the trend channel in late September. And that move was reversed immediately, with MSO falling back into the trend channel a day after that. Interestingly, however, MSO remained pinned between the upper boundary of the trend channel and the 10-day exponential moving average (EMA). This was an exceptionally bullish development, particularly in the wake of the ominous reversal in late September (the shooting star leading the pack of bearish ghouls). The 10-day EMA remained an effective support level for the next two months (though there was some turbulence in mid-November and a few consecutive closes below the 10-day). There was a challenge of the upper boundary in late October and again in late November, with the late November test resulting in another break above the trend channel's upper boundary.

Whenever prices break free from a trend channel--as with any other price pattern--traders and investors should be on the lookout to see whether that boundary will become support for the next move. This has clearly happened recently in the S&P (as I anticipated in my previous article), and it has also happened here with MSO. Note how prices consolidate into a symmetrical triangle immediately after the upside break. In fact, the lower edge of the symmetrical triangle is formed by the upper boundary of the trend channel!

Note also how the 10-day EMA, which provided support during MSO's advance, has moved closer and closer to the upper boundary of the trend channel. It is almost as if prices were squeezed so tightly between the support provided by the moving average and the resistance provided by the upper boundary of the trend channel that they virtually popped out of the channel. A mere seven-day affair, the symmetrical triangle itself was another example of how the compression of a rapidly shrinking volatility can result in an explosive move when the balance of pressure shifts. With a formation size of roughly four points and a breakout near 23, shares of MSO shot away from the upper boundary of the trend channel--now a fairly reliable source of support en route toward a minimum prize target of 27.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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