I wanted to share with you guys the channel breakout formation setup I see in GC0604.
First, channels are a natural extension of the high (low) hooks mentioned in our previous post. Think of them this way, the more times a high (low) resistance (support) has been challenged the stronger it becomes, and the harder it is for prices to break away from the channel top (bottom).
Originating from Joe Ross’s channel breakout, I’ve set the following modified simple rules for this setup:
- There are two conditions to enter a trade:
The channel is at least 40 days old, or the breakout will take a 40 day high (low).
Buy (sell) on a stop at a price set at a quarter of the height of the channel above (below) the ceiling (bottom) of the channel.
- To exit the trade on a failure:
Sell (buy) on a stop at the opposite band of the channel; bottom (top) when long (short).
For our example, the height of the October – November 2005 GC0604 channel is $27.5 = $490.1 – $462.6,
then a quarter of the channel is $6.9 = 0.25 * $27.5,
the stop order is placed at $ 497.0 = $490.1 + $6.9
and the protective stop at $462.6.
Looking at this present GC0604 chart, we see a similar formation with a ceiling at $579.5 and bottom at $534.5; so we have a potential breakout trade if $590.75 is taken,
from $590.75 = $579.5 + 0.25 * ($579.5 – $534.5);
and a protective stop at $534.5.
(I would consider a $562.0 stop protection; $534.5 is too harsh for my taste…)
We’ll see what unfolds.