”Spike plus channel” type of trends – general interpretation
This lesson will cover the following
- A quick view on spike plus channel trends
- The spike phase of these trends
- The three possible scenarios following the spike
During trading sessions every day very often one can detect the so called ”spike plus channel” type of trend. It may develop in quite many variations, while smaller trends are usually part of a larger trend. If one is to scrutinize a single trend, he/she will probably find out that two different phases can be identified – a phase during which a strong move (a spike) is present and a phase during which a channel is formed. Every trend usually is in either of these two phases all the time.
A quick view on spike plus channel trends
At first a sudden move (spike), consisting of one or more bars, can be observed. What is specific about this phase is that prices move quite rapidly and a sense of anxiety is to be observed in the market. It is so, because traders suppose that prices may go further. The spike can appear as a breakaway gap, meaning the whole market rapidly moves from one price level to the next.
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The move, that follows, is a pullback, which may consist of one bar only or several bars. Sometimes it may retrace beyond the beginning of the sudden move (spike). In case a sudden move to the upside occurs, eventually the following pullback may cause prices to plunge below the low of this bull spike. This is the point where a channel may begin to form.
The phase, following the pullback, is where the trend transforms into a channel (sloping trading range). Anxiety now decreases and uncertainty takes hold of the market, something typical for any trading range. As market players see that two-sided trading is now present, it is logical to think that the trend may come to an end. However, that is not what is actually happening. The trend continues to develop! Traders are in a hurry to lock in their profits, but as the trend extends, many of them will look to enter the market again (or to add to their existing positions), because they are not aware when the trend may come to an end. They also want to ensure that they are in active positions (no one wants to miss a good trading opportunity).
After the channel phase another sudden move (spike) may occur, which on its part may be followed by another channel. However, the second sudden move usually appears to be a false breakout and then a retracement may follow. In case a sudden move to the upside occurs, followed by a bull channel, where prices demonstrate weak momentum, the market may break out from the upper area of the channel (a second spike to the upside). In rare cases this second spike will be followed by another channel. This spike usually is a fakeout, after which a retracement to the downside occurs.
The spike phase
It is common for a trend to begin with a sudden move (spike) no matter if it consists of one trend bar only. This cannot be identified as a possible start of the trend until some more price action. We can say that almost all trends represent certain variations to the ”spike plus channel” type of trend.
In case price action is comprised by a string of bars, encompassing a considerable amount of pips that show little or no pulling back, this strong move is considered as a spike. It may appear as a single medium-sized trend bar, as a string of trend bars (ten or more) with little or no overlap or as a tight channel. A spike on a larger time frame chart often appears as a steep channel on smaller time frames. This spike usually ends at the first pullback, but however, if it continues within the next 1-2 bars, it actually turns out to be a second spike or a spike viewed on a larger time frame chart.
A spike to the upside means that traders agree this area is of no interest to sellers, thus, prices will probably climb further to area, where both sides (buyers and sellers) will be willing to trade. Prices will continue to accelerate to the upside until buyers prefer to lock in gains and not enter into new long positions, while sellers enter into shorts. Such a situation leads to a pause from the move up or to a pullback, which provides a trader with the first clue that two-sided trading might have probably begun. The opposite is valid for a spike to the downside.
The spike ends before the first pause bar of pullback bar, as the pause itself indicates the end of the sudden move. From this point on the market has to make one of the three possible moves: first, to resume the trend; second, to enter into a trading range and third, a trend reversal to occur.
The first scenario is very often observed. Prices pull back within several bars, sometimes ten or more, after which a resumption of the trend follows. This pullback actually tests the spike and marks the beginning of a channel. When the trend continues, it usually demonstrates lesser strength than before (as signified by a larger number of overlapping bars, a slope with lesser steepness, pullbacks and trend bars in the opposite direction). Obviously, it appears more like a channel, therefore, the entire configuration has now become a spike plus channel trend.
The second scenario includes a pullback, which lasts for over ten bars. This usually leads to a trading range, thus, prices may break out in either direction. Very often the breakout from the trading range occurs in the direction of the original trend. Despite that the trend usually resumes before the trading day ends (also known as a trend resumption day), at times the trading range breakout may turn out to be a failed one and reverse within the next several bars. In rare cases the trading range continues for several hours or days and as swings within it are quite short, it is known as a tight trading range.
The third scenario includes a trend reversal. In case the pullback from the sudden move (spike) lacks the strength to reverse the always-in trade to the opposite direction, it is very likely that the original trend may continue. In almost every case this continuation will appear as a channel. In a lesser number of cases prices will reverse and a spike in the opposite direction will appear. If such occurs, the market may soon enter a trading range, as buyers and sellers seek more price action in their respective direction. Bulls will continue to go long in an attempt to create a bull channel, that would follow their bull spike. Bears will continue to go short in an attempt to create a bear channel, that would follow their bear spike. Even though this trading range may be present during the remainder of the trading day, eventually one of the sides will overpower the other, thus, a breakout will occur. In such a case either the latter is followed by a channel (spike plus channel trend day), or the breakout is followed by another trading range (trending trading range day).