Horizontal Channel

Sometimes it's hard to see the pattern in a stock's price movement. The stock bounces around on a day-to-day basis. Trends take some time to materialize.

A stock might go up two days in a row, then down a day, then three days up, then down two days, then up and down in succession a few days, followed by two up days. Looking at the movement close up, not much of a pattern forms. But step back a bit, look at a longer-term chart of the stock's movement, and it becomes clear that the stock has trended upward. More up days then down days. Or the up days are bigger than the down days.

To make this process of eyeballing a chart a little more scientific, traders use trend lines. A common way to do this involves drawing lines to connect key highs and lows over time. The process leads to two trend lines, usually running roughly parallel, forming a kind of tunnel/channel that the stock is bouncing around in.

These channels can trend up, or down, or sideways. The sideways version represents a horizontal channel. The two trend lines form a tunnel moving sideways...meaning that the lines are horizontal. The stock will have a hard time breaking out above the channel's top or falling below its bottom. Until something happens, it's likely to remain between the top and bottom of the channel.