Statistically Positioned Trend Channels by Bob McCullough
Trend channels are a method by which to identify the outer boundaries of a trend. A number of methods are based on the technician's judgment to identify the components of a trend channel. Here's one method that reduces the need for seasoned judgment by using two statistical methods to determine the components of a trend channel.
Trendlines are among the oldest and most useful tools in technical analysis. However, drawing them can sometimes be a very subjective process, and frequently, they simply don't work when an analyst is trying to find price support and resistance levels. Statistically positioned trend channels can serve the same need as trendlines. Frequently, these channels are more powerful in helping an analyst locate support and resistance levels. They are also useful in helping a market technician anticipate significant trend changes.
Figure 1, a recent daily bar chart of LSI Logic [LSI], one of the hottest stocks of 1994, illustrates how a statistically positioned trend channel is drawn. Although LSI has been a strong performer, it has had some pullbacks. Considering this, it would have been useful to anticipate when these pullbacks were about to begin and when they had run their course. This could have been accomplished using trend channels.