As of 01/27/2023   Indus: 33,978 +28.67 +0.1%     Trans: 14,483 +191.14 +1.3%     Utils: 968 +1.08 +0.1%     Nasdaq: 11,622 +109.30 +0.9%     S&P 500: 4,071 +10.13 +0.2% YTD  +2.5%    +8.1%    +0.0%    +11.0%    +6.0% Overview: 01/13/2023     34,900 or 33,150 by 02/01/2023   15,100 or 13,500 by 02/01/2023   1,040 or 950 by 02/01/2023   12,400 or 11,000 by 02/15/2023   4,100 or 3,800 by 02/01/2023
 As of 01/27/2023   Indus: 33,978 +28.67 +0.1%     Trans: 14,483 +191.14 +1.3%     Utils: 968 +1.08 +0.1%     Nasdaq: 11,622 +109.30 +0.9%     S&P 500: 4,071 +10.13 +0.2% YTD  +2.5%    +8.1%    +0.0%    +11.0%    +6.0% Overview: 01/13/2023     34,900 or 33,150 by 02/01/2023   15,100 or 13,500 by 02/01/2023   1,040 or 950 by 02/01/2023   12,400 or 11,000 by 02/15/2023   4,100 or 3,800 by 02/01/2023

Bulkowski on Drawing 3 Point Channels

This tutorial discusses drawing a three point channel which is a channel where you have only three price turning points. Sometimes, future price action will follow the channel lines, and you can use them to determine when the trend is going to change (price bounces off a channel line).

Inspiration for this article came from Erik in an email. He asked about the following paragraph from the FIRST edition of my book (the second edition is shown), Getting Started in Chart Patterns, page 29.

"When price pierces a downsloping trendline and makes a higher peak (note: this is the second, higher peak), connect the two peaks with an upsloping trendline. Then draw a new line parallel to the original trendline starting at the low between the two peaks. The lower trendline shows where price is likely to reverse."

I call this a three point channel.

Drawing Up-Sloping Channels

Refer to the slide presentation for instructions below the chart, in red. There are four slides which load quickly...

1 / 4
Draw a down-sloping trendline along peaks ABC, which I show as a red line. You're looking for price to climb above this line, which it does at D.
2 / 4
When price crosses the line and forms two peaks (AB) and a valley between them (C), you can draw the three point channel. Being by drawing line AB connecting peaks A and B and extend the line into the future.
3 / 4
Draw a line parallel to line AB at valley, C. Extend line C into the future, parallel to AB. If this technique works, price will follow this new channel...for a time (until it breaks out of the channel).
4 / 4
This is the completed channel. Price follows the channel upward until it pokes out the top of the channel, reverses, and makes a determined plunge to D, breaking out the bottom of the channel and continuing lower.

This technique of drawing a channel with only three points, A, B, and C works when the new price action follows a trend, which is rare. Although it does not always work, it can give you a jump on where price is expected to turn.

More

Drawing Down-Sloping Channels

I could not find an example of where a three point channels worked for uptrends. For example, look at the above chart of Abercrombie on the daily scale.

Price trends upward following trendline A. At B the stock punches through the trendline, heading down.

The stock forms two minor lows at CD with peak E between them.

Draw a new trendline CD and extend it into the future. Draw another trendline started at the peak (E) between the lows CD so that the new line is parallel to CD.

In this example, price doesn't stay within the new channel at all. It posts an immediate upward breakout.

In order for this technique to work, the stock must trend in the new direction. Sustained trends are rare, especially downward trends, so perhaps you should confine application of this technique to upward trends only.

Drawing 3-Point Channels: Book References

Two of my books discuss three point channels.

Trading Basics has the information starting on page 122. It's visual tip #41: "Drawing Three-Point Channels."

Swing and Day Trading has coverage of "Trading using Channels" starting on page 15.

-- Thomas Bulkowski

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