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Bollinger Band breakout trades

July 9, 2012

09 July

As I referred to in today’s earlier blog, scans for trades meeting my entry criteria can be directed by a market viewpoint or even a possibility. Then, if that works out, the trades you have found that match your entry criteria will work out.

iShares Consumer Goods (IYK) v iShares Malaysia (EWM)

Iyk_rel_ewm_weekly

This pair fits the Bollinger Band entry criteria.

  • Band width has reached the tightest in the last three years
  • The chart has a clear moving average direction (up not sideways) and a breakout in the direction of the moving average will be bought, if given
  • The entry criteria are a break of the upper band on an end of week basis, with an expansion of the band width

Daily chart

Iyk_rel_ewm_daily

  • Such a break will likely clear resistance
  • The stop loss would then be below the late June low

Allergan (AGN) v Cigna Corp (CI)

The second example is a health care pair. This has already broken the upper Bollinger Band, which was at its tightest for over three years. The breakout is in the direction of the moving average.

Agn_rel_ci_weekly

Daily chart

Agn_rel_ci_daily

A consolidation that began in late December was recently broken.
The ratio has pulled back by almost 3% today and I wouldn’t want to see too much more of a pullback. Good examples of these breakouts don’t hang around either in time or price once the break has occurred.

With the long term entry signal given already, you could use a shorter term pattern break, maybe even intraday to buy this. The normal stop loss would be below the consolidation that preceded breakout (the 25 June low). It could be argued that a shorter term entry method then warrants a shorter term stop loss. I’ll leave that to you.

A proper write up of FIRE, my new breadth package will come next week, when I get a clear week to look at it.

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