with regard to your preselected trading interval. From the above work, you can see clearly which of the components found is most regular and altogether dominant. You can also determine roughly the percentage move to be expected. Naturally, you will want to trade on a component move that provides plenty of room to clear transaction costs, and to make the size profit you desire. Do not forget to take into account the fact that you will probably be unable to buy at the very bottom and sell at the extreme top.

It is helpful to note whether or not a given whole number (usually two or three) of shorter components exists m the duration span of the trading cycle you select. The behavior of these can be used to sharpen up your get in and get out points. Oftentimes, several of these shorter duration cycles can be used, each telling you something about the status of the next longer duration one.

It is a good idea also to make or procure a daily chart for your stock. This does not need to cover as long a time period as the weekly one, but it should show at least one and a half cycles of the trading component. Transfer the appropriate channels from the weekly to the daily chart. You will usually find that several more periodicities (of very short duration) are identifiable here. Usually the variability of these prohibits use of more channels, but the successive lows can be identified. These may be used as a very fine vernier on your transaction timing.

If you find (as you occasionally will) that you cannot make "cyclic sense" from the stock you have selected, it is a good idea to forget it as an mvestment vehicle and find another. After , there are literally thousands to choose from. Why take chances with one you cannot understand?

As you practice making these envelopes, note the following: the envelope is valid, past-history, and will never need changing from the last well defined high or low backward in time. Since this point can never be much more than half a cycle duration from present time, the maximum time lag of channel validity is one-half cycle of the enclosed fluctuation. Of course, you should always draw in lightly your best estimate of what the channel is doing in this period-changing channel bounds as price action makes this necessary until you reach a new high or low. A t this point in time, the time lag is zero and your channel is valid up to current time. This means uncertainty is at a minimum and the situation represents a particularly low-risk decision point. Even before this time you will often note that a smgle days price motion wiU alert you to a change of conditions by movmg outside the estimated channel position. This tells you either that fundamentals are changing, or that you have previously misestimated the status of the sum of all longer duration components. In either case, appropriate action can be taken.

The above discussion provides the overall considerations to be kept in mind when using channel analysis. Some of these procedures will be valid and useful for some stocks while other aspects of the analysis may be better for others.

USE THIS EXAMPLE AS YOUR CHANNEL PREDICTION GUIDE

Assume that some one has provided you with the data tabulated below. All you have are the highs and lows for some issue (say "Z" Corp.) for a series of weeks as of the close each Friday:

Now try something. Run your eyes down this tabulation and study it well. Just from this scan of data alone, infer just as much as you can about the future price action of the stock. Write down your conclusions before continuing this chapter. If you are like most of us, you wUl gain very little from this exercise regarding action you should take in order to trade profitably in the stock. Is the stock a buy? If so, now? Later? How much later? Should it be sold short? When?

Now turn to Figure IV-1. From this conventional plot of the data, you should immediately obtain a much improved feel for what the issue is doing. Just the act of plotting the data has added visibility. Once again, write down your impressions of what you should do with this stock. Is it Ukely to make you money if you get in it? If so, how much? Is it going down from hcre-or will it continue the current uptrend? What should you do with it. and when should you do it? At this point in the analysis, you will probably experience difficulty in answering such questions. Remember, you dont even know the name of the stock. You know nothing about the company that issued it or their products. You dont know whether dividends are paid or whether the earnings situation is unproving or deteriorating. You are not even aware of what the market as a whole is doing! Can channel analysis help?

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Plotting Helps-But Not Enough

CONSTRUCTING THE DOMINANT CHANNEL

Turn your attention to Figure lV-2. Here is the same data, but with a first envelope drawn about it using the techniques described earlier. Notice that the channel is constructed to enclose a component for which eight samples are present of about