The Federal Reserve raised interest rates so fast that short-term interest rates have exceeded long-term rates, creating an inverted yield curve – which is a precursor to recessions.

Inflation is at levels not seen in decades, and the 2-year bond yield are nearly 4.5% and 10-year bonds are 3.6% – and the Fed isn’t finished pushing rates higher.

As interest rates climb higher, individuals and corporations alike are finding it increasingly more difficult to access credit, so demand will fall, sales will decline, and people will find themselves out of work – a trifecta the Fed is willing to accept in order to rein in inflation.

Although a recession is looming, corporate layoffs are on the rise and there’s general pessimism regarding an extended period of high inflation, I’m not going to allow it to be my focus.

Instead, I will focus on things that I can control: patterns that occur in stock and market trends – the kind you can make money from despite the chaos in the news.

My focus will be on stock chart trends and identifying trend changes – finding the place and time to take on profitable trades.

When short-term, intermediate- and long-term trends intersect with each other, it becomes the perfect trifecta for determining trend reversals through channels.

I’ll tell you what I mean.

Determining Trends with Channels

Let me first explain what constitutes a trend’s channel.

The image below highlights two channels for AMZN over time.

The first channel (purple highlight) represents 100% of the stock’s price movement within the timeframe highlighted – in this case the channel represents 92 trading days.

Because 100 percent of the price bars are accounted for in the channel, you’ll notice that both the highest and lowest points are included.

Simply by drawing two lines, one line to capture the highs, and another line capturing the lows, and a channel is created.

In the example below, the purple channel (Intermediate) slopes downward, so essentially, we would expect the stock’s price to continue on its path until it breaks out of the channel at some point in the future.

The second channel in the image above is highlighted on the right side of the graph. In this case the peaks and valleys of price action include only 28 trading days.

Channels can be created using almost any time frame you choose.

You may look at price action over a two-year period and call it a long-term channel, or you may be observing eight months of price activity and call it an intermediate-term channel, or perhaps you’ve only got 28 days of price activity, as I highlighted in the example, and you’d call it a short-term channel.

Regardless of the time frame you’ve selected for a channel, the key is to identify which direction price is moving inside your channel – If the channel slope is up, you’d consider it bullish. If down, bearish, and if it is simply moving horizontally, you’d have a sideways channel.

Combining Channels to Indicate Trend Reversals

I mentioned above that news can lead to chaos and Fed action can cause economic conditions to become better or worse. And, since I can’t control those things, I’d rather turn my attention on stock patterns and make money off the data at hand.

So far, I’ve shown you how to identify stock price patterns in the form of channels.

Now, let’s take a look at what happens when channels “collide.”

In the chart below you’ll see a short-term trend highlighted by red parallel lines.

Additionally, you can see the slight downslope of the longer-term channel – highlighted in purple. And, you can see the intermediate channel moving horizontally – highlighted in green.

The short-term (red lines) channel is also in a down trend, so, as a trader, you’ll be interested in knowing when the short-term down trend reverses into an uptrend.

Without fanfare of headline news, the three channels (short-, intermediate- and long-term) intersected at the mid-point of the graph – highlighted by the purple circle, which shows us a turning point for the short-term trend.

After the channels intersect with each other you can see how it is followed through by a price breakout on the short-term channel, reversing the down trend… and the rest, they say, is history – welcome new bullish trend.

There are so many patterns to evaluate – patterns that can create profitable trading opportunities.

Be sure to join my discussions each week to learn about trends, channels and other patterns traders should have as their tools for success.

I’ll see you soon,

Tom Gentile

Source: Money Morning