Inspired by the Dow Theory and by observations found throughout nature, the Elliott Wave Theory identifies a repetitive pattern of five waves in the direction of the main trend followed by three corrective waves. These waves are used to predict movement of the stock market. Ralph Nelson Elliott used Price Channels as a method of arriving at price objectives and to help confirm the completion of wave counts.
Once an uptrend has been established, an initial trend channel is constructed by drawing a basic up trendline along the bottoms of waves 1 and 2. A parallel channel line is then drawn over the top of wave. The entire uptrend will often stay within those two boundaries.
If wave 3 begins to accelerate to the point that it exceeds the upper channel line, the lines are redrawn along the top of wave 1 and the bottom of wave 2.
The final channel is drawn under the two corrective waves (2 and 4) and usually above the top. If wave 3 is either unusually strong or an extended wave, the upper line may have to be drawn over the top of wave 1.
The fifth wave should come close to the upper channel line before terminating. For the drawing of channel lines on long term trends, it's recommended that semilog charts be employed along with arithmetic charts.
The upper trendline will mark resistance and the lower trendline marks support. Price channels with downward slopes are considered bearish and those with upward slopes are bullish.
Look to buy when prices reach main trendline support in a bullish price channel. Sell (or short) when prices reach main trendline resistance in a bearish price channel.