HOW TO USE THE 20-DAY PRICE CHANNEL FOR SHORT-TERM TRADING -- S&P 500 REMAINS BELOW 200-DAY AVERAGE

20-DAY PRICE CHANNELS... Here's a simple trading tool that you might want to incorporate into your work. It's called the "Price Channel" and you'll find it under the Overlays list below moving averages and Bollinger bands. One of the most popular versions of the tool is the 20-day channel which is derived from the "four week rule" that I wrote about in my first book twenty years ago (invented by Richard Donchian, a legendary commodity trader). By choosing the number 20, price channels are placed above and below the current price based on the highest and lowest prices reached over the prior 20 trading days as shown in Chart 1. When prices hit the upper band (blue circle in mid-March), that means that prices have hit a 20-day (four week) high and a short-term buy signal is given. In its original version, that short-term long position would be held until the lower channel is hit (a 20-day low). Stockcharts, however, offers a closer stopout point which is the middle dotted line that is located midway between the outer channel lines. You can liquidate your long position when that middle line is broken (blue arrow). The red circle shows a short sale signalled in mid-January which lasted until March. The system isn't perfect however. A short-term buy signal was given in early January which proved untimely. Fortunately, a quick break of the middle line within a week terminated that trade with a small loss. At the moment, the short-term trend of the S&P 500 is still up. A close below the middle line at 878 is needed to take some profits. The 20-day channel is a short-term trading system. You can vary the channel number to make it longer-term (more days) or shorter-term (less days). The four-week rule (or some variation ) can be used in all markets. Since it's a trend-following system, it works best in trending markets and less well in a trading range. Intermediate and long-term buy and sell signals can be got by using 10- or 40- week channels and can be tied to the direction of those moving averages. That has special significance for the 200-day (40-week) moving average which is still falling (Chart 2). A bull market normally requires that prices exceed that line and that the line itself turns up. A 40-week channel tells us how far prices have to rise for that to happen. I'll explain how to do that later in the week. In the meantime, Chart 2 shows the S&P 500 remaining below its falling 200-day moving average.

Chart 1

Chart 2