Identifying Opportunities in Market ‘Chunnels’

Mission Impossible: Seconds feverishly count down as a helicopter races after a train that happens to hold a briefcase with a code that could determine the end of the world (naturally).

Unbelievably, the train heads toward a tunnel that seems to take it straight below the sea. Welcome to the ‘chunnel’ in the English Channel, home to drama of historic proportions, real and dramatized.

Your mission, should you choose to accept it, is to use the ‘chunnel’ in your given market to profit, regardless of the pressure. Fortunately there are clear signals and clues that can help you along the way.

Price’s passageway that you should have on your market map

The Chunnel is rivaled only by the Seikan in Japan, which is actually longer, but has less distance under the sea. If you’re on the Eurostar, you’ll be cruising at about 100 mph which means the London to Paris trip will take just over two hours.

During periods of high volume and price consolidation ‘chunnels’ are made in every market. Much like the European passageway, these channels can be clearly defined by their pronounced boundaries at the top and bottom.

Even as the market pursues a new price level, it will usually do so within a defined range that can be monitored. The edges of the range can be plotted using any number of tools — the most popular of which are the Bollinger bands — which give you simple moving price averages.

Once in place these channels, or ‘chunnels’, serve as an excellent reference point in determining the market’s preferred trading range.

A gateway to projecting direction and value

The chunnel handles an amazing amount of volume every day — with around 400 trains passing through with 50,000 or so passengers, 6,000 cars, 180 coaches and 54,000 tons of freight. With that type of activity there are bound to be mishaps. On December 18th, 2009, five Eurostar trains broke down, trapping 2,000 passengers without power.

When the market is trading with high volume within a defined channel, a clear picture regarding value and direction comes into focus. The middle of the channel, where the most traffic is taking place, is considered fair value. The edges define overbought (top) and oversold (bottom) conditions.

To determine this, simply draw a line across two market highs. Duplicate that and fix it to the market lows. As shown with the ES example here, you can then project these lines into the future. If you’d like another comparison point, insert Bollinger bands with default SMA (Simple Moving Average) settings.

Spot the chunnel in your market to project high probability entry opportunities!

When price is making an orderly transit to a new level, you can see the bounds within which the buyers or sellers are kept. In a range trading day, when the market is grinding along sideways, there is usually an equal distribution of volume with proportionate drops at the high and low points.

It’s these high and low points that can be monitored for breaches and potential entry opportunities.

Making your play for the middle where price meets fair value

Fascinatingly enough, both the English and the French started digging on both ends of the channel, eventually meeting in the middle. But not quite the middle — it turns out that the English side tunneled a greater distance.

When looking for entry opportunities at the edges of a market channel, you’re essentially making a play towards the middle, where fair value price is usually pulled. Like the 35-minute ride under the English channel, your time in the market will be relatively short as the market yanks price to the center.

Plot quick-hit high-probability entries at the edges headed for the middle.

As you evaluate any given market channel, it’s vital to note that there are intermediate levels. On your way to the middle these are often respected with interim reversals or bounces. Bear in mind that these are often short-lived and don’t represent quality entry opportunities since they are essentially market chop.

Putting out fires in the form of breakouts

Three fires have occurred inside the ‘chunnel’ that were severe enough for it to close. The most serious was in 1996, which took out 500 meters and fouled up operations for six months. You’ll be relieved to know that an automatic fire dousing system is now in place.

Even when price is plodding along, respecting a defined channel, there are events that can turn a minor value breach into an all-out breakout. These can be monitored simply by keeping an eye on the RSI (Relative Strength Index) or the MFI (Money Flow Index).

If you’re headed for the top or bottom of a channel, but the RSI and/or MFI is smack dab in the middle — the market may have more gas left in the tank to fuel the breakout. If it’s at an extreme — above 70 for overbought and below 30 for oversold — a bounce back to the middle is more likely.

Profit on both sides of the pricing chunnel

Ideas for the ‘chunnel’ first appeared as early as 1802. It was initially started in the late 19th century, on the English side — only to be shut down again. It wasn’t until 1994 that the concept was fully realized — with a price tag of £4.6 billion pounds — 80% over its projected budget.

You don’t need to wait 192 years before using your market chunnel to efficiently profit. Simply look for areas of high volume and price consolidation. Identify the edges, even in trends, with the help of quickly-set Bollinger bands.

When price exits one edge or the other, your opportunity to strike has arrived. Bravely make your entry with an eye on RSI or MFI with a mission toward the middle of the range.

Nod smugly as they write about the incident in the paper, knowing you anonymously profited big.

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