Two weeks ago, I began a series of articles on nested Keltner channels. Keltner channels are not the most popular of indicators, and I have never understood why. Since I discovered them in an article by Jerry Wawrzeniak ("The Case for Keltner channels"), I can't imagine trading without them. Through the years of watching prices on nested Keltner channel charts, I've built on the information contained in that original article, using them in ways that I haven't seen described elsewhere, in addition to the ones Wawrzeniak detailed. The first of my series of articles set out some of the ways that I typically use these channels.
To review, Keltner channels can help traders determine when momentum might be creating a breakaway mode. That's certainly been a useful determination these last weeks, hasn't it? If prices are in breakaway mode, some oscillators such as RSI are rendered less useful than at other times, and it's helpful to know when that's occurring. Nesting Keltner channels can help traders decide where support or resistance might lie and determine which appears stronger.
In addition, nesting these channels can often help traders determine likely targets for price movements, even if prices are reaching into new territory where no prior support or resistance can be found. That's one of the most useful characteristics of nested Keltner channels.
Trader's Corner articles on March 10 and 17 skimmed these topics. Now it's time to wrap up the series and cover the last topic. Remember that we're often on surgery- or illness-watch here in my family due to my grandchildren's disability, so my articles are almost always prepared ahead of time, with charts that might have been annotated a week or two earlier. They don't show current values.
Annotated 15-Minute Chart of the OEX:
Since that Keltner support looked stronger than resistance at the close Friday, 3/16, one assumption might that the support would propel prices up to test resistance, either straight away Monday morning or after a retest of the support. However, the annotations on the bottom of the chart illustrate one way that nesting the channels can help traders set up some if/then situations to determine when their presumptions about the market are wrong. Such if/then situations can be used to determine entries or set stops, depending on bias and time frame.
As it turned out, those assumptions about the relative strength of support versus resistance turned out to be right. That next Monday morning on 3/19, the OEX headed up to test resistance without even needing a retest of support.
Annotated 15-Minute Chart of the OEX:
These if/then situations can be determined from studying daily charts, too, and can be utilized in many types of plays. For example, I often use nested Keltner charts to help me determine when to make exit plans for a credit spread I might have open.
Annotated Weekly Chart of the RUT:
This chart was annotated in mid-March, so the Keltner levels had changed from their late-February levels by then. However, studying this chart in late February, as the RUT was approaching and then testing converging blue- and black-channel resistance helped me determine a plan for my trade. I do not want to spend any unnecessary time worrying about plays, but I do want plenty of time to plan my exit strategy. Studying this chart as it existed in late February showed me that a weekly close above those converging lines would alert me that my sold strike was likely to be tested, if not violated. I would need to have exit plans in place if that happened.
Of course, we know that the RUT can travel pretty far in a week, so by the time that weekly close was produced, my sold strike could have long been violated. However, I could still use any intra-week break above that converging resistance as a sign that I needed to have my exit plans in place. Essentially, my plan was that if the RUT violated that weekly resistance, then I would start worrying and preparing my exact exit.
I could also have dialed down to a daily chart, watching resistance levels on that chart. Fortunately, none of that was needed, and I was spared unnecessary worrying. The weekly resistance held.
Other than the fact that black-channel resistance often does hold, I'd had other hints that it might. Keltner-style bearish divergence was beginning to show up on that chart. Next week's Trader's Corner article will concern divergences. While that article won't focus on Keltner channels specifically, I will touch on Keltner-style divergences, too.
I know that won't convince all traders that mess of spaghetti-like lines is a
useful way to chart prices, but it certainly has proven to be so for me. Enjoy!