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Channel Lines Part 2

The channel technique can also be used to spot failures to reach the channel line, signaling the weakening of a trend. As a general rule the failure of any move within an established price channel to reach one side of the channel, usually indicated the trend is shifting and increases the chances that the other side of the channel will be broken. See below how the failure of prices to reach the channel line at point 5 serves as an early warning the trend is turning and increases the odds the trendline will be broken.

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A channel can also be used to adjust the basic trendline. Below, note when the channel line is broken with point 5, our trader drew a new trendline parallel to the new up channel line. With the uptrend accelerating, it stands to reason the basic trendline will accelerate as well.

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When prices fail to reach the channel line, as seen below, a down trendline can be drawn between points 3 and 5, and tentative channel line can be drawn parallel from point 4 to show where initial support can be seen.

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The measuring implications of the channel line state once a breakout occurs from the existing price channel, prices usually travel a distance equal to the width of the channel. So the trader simply measures the width of the channel and projects the amount from the point at which either trendline is broken. Even though the channel line works often enough to be a very useful tool, remember, it's the basic trendline that is most important.