Monday, July 2, 2012
Spike and inverted channel
A strong spike can give a channel in the same direction of the spike if the price continues to move in the direction of the spike. Occasionally, such as today, we get a channel in the reverse direction of the spike.
A channel in the direction of a strong spike often goes to a measured move of the entire spike. Traders expecting a channel in the bear direction today were probably surprised to encounter the rarer inverted channel. There is one clue that foretells a possible inverted channel: A smaller spike in the opposite direction (b9-11). If the spike is followed by a spike of any reasonable strength in the opposite direction, you would be cautious of a possible inverted channel.
A with-trend channel often (but not always) goes to a measured move of the entire spike. So for a 10 point spike such as today, traders could expect a channel lasting 10 more points down. An inverted channel similarly will reverse the entire spike and is often a good swing at the first pullback (b32) or first deep or 2 legged pullback (b56).