Descending channel patterns are short-term bearish in that a stock moves lower within a descending channel, but they often form within longer-term uptrends as continuation patterns. The descending channel pattern is often followed by higher prices, but only after an upside penetration of the upper trend line. The stock will continue channeling downward until it is able to break either the upper or lower trend line. An upside break is bullish, while a downside break is bearish.
Appearance: This is a channeling stock with a downward tilt. The stock’s price action is controlled by two parallel trend lines. Above the stock is the primary descending trend line which connects consecutive lower highs. Beneath the stock is a secondary trend line, which also is descending as it connects consecutive lower lows. Price follows the path of least resistance in a descending channel, which is down. Upon reaching the lower trend line, the stock bounces until it reaches the upper trend line, which acts as resistance. Trading a descending channel in the most effective way is by waiting for an upside breakout to occur before entering.
Breakout Expectation: Channeling stocks within descending channels are only able to reverse course with an upside penetration of the primary descending trend line. The strength of this breakout, the duration of the channel, and the width of the channel will determine how far a breakout may carry. A downside breakout from a descending channel indicates a higher intensity of selling, and is a sell or short sell signal.
This stock formed a descending channel within its uptrend. This was a narrow channel with a strong breakout on heavy volume, and the move carried the stock much higher in just a few trading days.
We highlight descending channel patterns on a regular basis for members of our stock pick service. Come trade with us!