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24

The following chart shows that Seagrams definitely established a clear uptrend channel. This three-year chart shows that the stock found great resistance each time the stock rallied up to the upper range of the trend line and the 1.27 projection of the prior decline. One of the most incredible aspects of this chart is that the price action formed this bullish channel over a four-year period.

SEAGIIAMS (VO): DAILY 1.27 BULUSH CHANNEL

If you owned this stock and was aware of such cyclical price action, what would you do when the stock hit the 1.27? Hopefully, you would understand the significance of this price action, and take profits or short the stock, when it tested this area.

The trend line adds to the resistance that the stock experienced. But, what if the trend was not going to reverse off the upper range ofthe trend line and breakout? How would you know? The price action would usually indicate such a move through the waming signs of a price gap, tail close or extreme price range.



The next chart illustrates such a breakout. I have included this chart of a major breakout that Seagrams experienced. The stock clearly broke through the upper channel and the 1.27 resistance levels. When this occurred, the stock rallied sharply.

SEAGRAMS (VO): DAILY Ul BULLISH CHANNEL BREAKOUT

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Since the bullish channel existed for over four years, this break out is especially significant. The stock rallied impressively, as it climbed nearly fifteen points with a few weeks after the breakout. Such price action is very significant, since it represents a dramatic change in mass perception with the stock.



1.27 Bearish Channel

The 1.27 Fibonacci projection can be found as support in bearish channels as well. The bearish channel will form a defined range with a consistent negative slope. In this situation, the trade opportunity can be defined by the 1.27 projection and the lower range of the channel.

bearish channel: support at l27 projection

If such repetitive price action is identified, a high probability trade setup exists by buying at the low end of the channel. The channel should be very clear with continual support at each 1.27 projection. The next example will demonstrate the set-up.

The following chart of Gateway Computer illustrates the bearish channel. The stock formed a clear down trend that bounced off the 1.27 projection of the prior rally several times. Although this is a short-term daily chart, it still illustrates how the 1.27 acts as support in a bearish channel.



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