Now you know the pyschology of stocks behavior. However, a lot of times this chart pattern can actually be hidden. Maybe there's inflation so the stock channels on it's way up. Maybe the stock channels while trending down.
Often times it's best to look at a stock not in dollars, but in comparrison to an average of gold, oil, silver, or a combination of all of these. I caught part of Erin Brunette talking to Kudlow aabout how she was talking to someone who had a formula for calculating future inflation, and it had to do with gold multiplied by some number divided by 3. She came up with 5.8% Now if you break this number down monthly it's a little more than .4%. So if a stock goes up .4% per month the value actually isn't going up, but it's just meeting inflation. In addition, the general stock market growth might be up or down, effecting the price of a stock, so you will need to factor that in. You will also need to factor in the sector. You could very well have a stock that's channeling up and down in terms of buying and selling fighting back and forth trade for trade, but the demand is less at this point, so although the bear and bull are still fighting in this manner equally, the bull is being more cautious about how much he buys for. As such this stock will channel all the way down, forming two trendlines one for support, and one for resistance, but the stock will fall as the trend of the sector, or overall market, or whatever falls. However, if the things holding a stock back start to turn around, the stock could still sort of have the same buying and selling activity, but now start to go up.
For this reason, it's very useful to watch the federal reserve, and understand the cycles, as Jim Cramer outlines well in his books, as does Mark Boucher in thee Hedge Fund Edge.
As other things turn around in a sector favor, the same bull will be far more willing to buy the stock for higher, as the things underlying the company are now stronger, perhaps the underlying asset is even worth more. When this happens, often the same level of buying and selling won't really continue. Whatever happened with the market, the sector, etc that was a liability on this stock, now turns around. Those buying will load it up, and more people will start to load it up. You oftn will see a break of the trendline before the rally, but you will usually see this take a lot longer than the trendline will indicate, because the breakout could still be on its way down it could just slow the rate of decay. But in order for it to hit bottom, it might need an overwhelming amount of buying pressure, but usually it will occur as result of the sector bottoming out, recovering, and THEN the sellers start to realize there short doesn't look so good anymore. Often times this downward action can lead to it channeling more horizontally the way most channels look, or 1 last ditch attempt to short and bring the stocks down, before you have a more W shaped bottom form.
Now many times in a bull market stocks will channel on the way up. In general not only are there more bulls beating the bear around, but the bulls are saying "OK, I'm not concerned what price I get in, I just want to get in now" The Bears are being more selectve in there timing. Stocks will trend up. A lot of times the more the stock trends up, the more the bears give up, and the stock accelerates to a climax peak. Other times the bears will get a brief "win" against the channel, and they will win for a while, form a base, and maybe try one more time befer it turnes around. They often will form a base or a cup with handle, or even channel a couple times for a double bottom or W shaped base. This is the same in principal as before, only sometimes even more so as the bears may have inveted a lot in brining it down, and the bulls pannicked briefly, before fighting the bear. Generally the sharper and larger and more violent the channel is, the larger and mre violent the breakout will be.
You will want to look for channels in disguise though. If you compare stocks to the price of gold, or silver, or inflation, or the sector it's up against, or the market, or a combination of all of these, you will often be able to notice a breakout before everyone else does. If gold, silver, and oil all drop but this oil stock remains flat while other oil stocks go down, that stock is actually going up against all of these other things. If either the rate of decay at which oil, gold, and the market fall actually slows a little bit, this stock will start to go up. If it turns around and starts to rise, this stock will go up much higher.
When you watch the market in comparrison to other important indicators, you can often see a breakout before it happens. Perhaps these are the catalysts which cause the bulls to hang on to the stock near the top and through the resistance, and the the shorts to finally give up. Every pattern might exist against the dollar, but that's only one comparrison that many people use. But the dollar's value does not remain the same. When you compare it to the price of a stock going up, the ability for the dollar to buy that stock is less.
I don't think that enough people understand what really happens in the market, it's really just a bunch of exchanges, and people wanting to exchange more of something, and less of something else. All it is is trade. If the dollar is going to continue to go down, you better not be in cash. It might be difficult to find something, especially if people are trading less, but the dollar is falling in comparrison to other things, meaning those other things will have more and more value.
Unfortuantely it might be difficult to find what those things are. Which is why it's important to understand everything you can and the reasons behind them. You might be able to make a lot of money off following tends, but what if something's channeling horizontally when everything else is good? It's actually losing value in comparrison to these other things. HOWEVER, when those other things go down, people still might transfer there money into something else that they haven't been buying a lot of. So although the value of other things declining all of a sudden could cause this stock to go down, if people don't leave the cash after selling on the sideline this channeling stock could bust down quickly, and then hit bottom and bounce. This would be somthing like the overall market after september 11th. It dropped off rapidly as everything that was good turned bad, but it just went to cash out of fear. Now shortly after, people went long, the plunge protection team stpepped in, and it rose shortly after. Now what about the dotcom bubble. People took their crazy dotcom stocks, the things that had been going up like crazy, and meanwhile there were definately some other stocks that weren't doing too much, but were undervalued. Although these stocks might have only been chaneling sidewyas, but in comparrison to the rest of the market were going down, when the breakout was over, and the dotcom stocks got smacked down back to reality, and everyone bailed out, no one in their right mind wanted to own them anymore. They all went to cash, and the whole market took a hit, and when that happened the stocks that were channeling sideways got hit, but eventually that money got reinvested not into the dotcoms that everyone had lost their confidence in, but in the stocks that were extremely cheap in comparrison, even more so after the fall... The thing is, although owning a channeling stock, or even a stock gaining gradually during the dotcom bus would be losing value in comparrison, it would be a great sstock to invest in after it dropped, because when it dropped, it would not have dropped as much as the dot coms, and suddenly although it's falling, it's going up in comparrison to the rest of the market which is falling rapidly. You could have recognized this trend and jumped in early, or you could wait until the volume tells the story you want to hear and the stock breaks out.
Up next: Volume Tells A Tale
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