Parallels for Target Confirmation
Yesterday’s market showed multiple parallel lines, but even a single parallel will often confirm a target. This is particularly true when price breaks out of a triangle.
Last week ended inside a small triangle (magenta lines), and today’s first bar made the third touch of the pattern bottom. Triangles without decreasing volume have a much greater failure rate, but as you can see with today’s action sometimes they work anyway.
There are several ways to create a target for a triangle, but the simplest is to draw a parallel to the side of the triangle opposite the breakout. Price will often stall or reverse when it reaches that line as it did today. But targets are not necessarily reversal points — just places to take partial profits.
Today is a good example of how I continually change my trendlines and parallel channels as the day progresses. After the breakout there was a small pullback that allowed drawing the lower yellow trendline. The pause at the triangle target ended as we hit the extension of that line. As soon as we continued higher, the yellow parallel could be drawn, and the next pivot top occurred at that parallel.
Once again we went sideways instead of reversing, and if you looked at a one minute chart you would see a small down channel could be drawn using parallel lines. When we broke through the top of that channel the upmove continued, and a new trendline (blue) could be drawn through the pivot at “B.”
A parallel to this blue trendline also confirms a logical turning point just as price reaches a Fibonacci extension (C=62%.) I draw most of these lines during the day, but often erase many of them to reduce confusion when I post a chart. Even the parallels that are never reached give important information about the momentum of a move.
A book I often recommend (Edwards and Magee’s Technical Analysis of Stock Trends) gives step by step directions on how to draw these ever changing channels that help guide you through the trading day. Add a little Fibonacci and you get confirmation of signals from two entirely different methods.
[Read My Review] In my opinion, the BEST book about chart reading.
Edwards and Magee: Technical Analysis of Stock Trends 