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Examples of Bollinger bands tightening on price

May 14, 2012

14 May (blog 4 – the last one)

So far my Bollinger band contraction examples have been pairs trades. There are more of them to look through and so examples should be easier to find.

Here are some examples of 40 week Bollinger bands on raw price that have:

  • Contracted to their tightest in three years
  • Have an obvious recent tightening, not a dribbling together of the bands

See the methods page for the full outline.

Example 1 – U.S. Steel (X)

X_boll_bands_rtt

  • The 40 week Bollinger bands have contracted to their tightest in over 10 years
  • Price is still below the falling 40 week moving average
  • I am looking for a break below the lower band. The entry signal will be (as always) an end of week close beyond the lower band and an expansion of the band width
  • The stop loss will not be particularly tight on this. Even if you got above the 18 April high of $29.54, that will be almost 20% away. Maybe you have it tighter, above the 09 May high of $26.87. That is your call, I’m just showing the set up

 

It is a while since Bollinger band contractions have been a factor on this chart. This is because the crash widened the bands so much. In the glory days of 2004 – 2007, this stock would resume its uptrend following Bollinger band contractions of a consistent degree.

Example 2 – Covance Inc (CVD)

Cvd_boll_bands_rtt

  • This is a health stock, the Bollinger bands are their tightest since Jul 2008
  • Price is below the falling 40 week moving average
  • Again, look for a break below the lower band to open a short position
  • The stop loss is above the high of 02 May of $47.92. The long tail of the following day’s bar looks like a rogue trade

These two examples have made little progress since the index lows of last autumn, so they might struggle in a neutral or down market. The flip side is that they might not be the worst stocks in the market. They might get some relative strength reversion but this is an absolute not relative trade.

Example 3 – Novartis AG (NVS)

Nvs_boll_bands_rtt

  • This stock is a.. alright, you know what this is
  • The bands are the tightest since May 2007
  • The moving average has turned down
  • The bands are now visibly pinching rather than dribbling together
  • The price has done nothing in the index rally since last autumn

Being in a defensive sector, this might not be the best performer as a short but it meets the criteria for tight bands, so wait for the entry signal of a close beyond the band and a band width expansion

Example 4 – CSX Corp (CSX)

Csx_boll_bands_rtt

This stock is a rail container operator and the 40 week bands are the tightest since October 2004.The moving average is flat, a disadvantage over the first two examples, as far as taking a short trade anyway. I’m showing it as it has hardly participated in the market rally since October 2011 and this might be a consolidation before continuing lower.

Rare trades

The above situations are rare. I scanned 592 stocks and indices, got 25 results and picked the best four. Scan results are a good start but they always need the human eye.

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