Are the Bollinger Bands Foreshadowing a Big Move?

Posted on April 4, 2013 by Andrew Thrasher — 3 Comments ↓

It’s fascinating how fast people’s sentiment has been changing, in both directions, over the last few months. Yesterday we had a down day with small caps ($IWM) and Transports ($IYT) showing noticeable weakness. Taking a look at my twitter stream you would have thought the world exploded. I saw numerous tweets of people calling to batten down the hatches, many of which had been bullish just the day before. Can a single day’s price action have this much affect? Or are traders THAT nervous about a correction that just a 1% move makes them change their underpants?

So where do I stand? I still reference the charts that could end the rally and that the equity market is playing a game of Jenga, but it takes more than a one day drop to make me put on a helmet. It would be weird if we didn’t touch the 1576 high in the S&P, but price leads and if it’s helmet time then it’s helmet time, who am I to fight Mr. Market?

The chart I want to share today is the Bollinger Bands around the S&P 500 ($SPX). With the lack of volatility (standard deviation not the $VIX) the bands have tightened. Take a step back we can see that the Bollinger Bands have only been this tight six previous instances on a daily chart since 2006. The most recent time being late-August of last year before the S&P shot higher by about 70 points over seven trading days.

When Bollinger Bands tighten like this it typically precedes a large move in either direction. By just using the bands we can’t forecast the direction of the move, we can just know that a large move is likely. As I said earlier, I would be surprised if we didn’t at least kiss the 2007 intraday high, but the weakening internals may just be strong enough to pull the rug from underneath the bulls before they get the chance.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

Bearish Candles in Large and Small Cap Equities

Posted on December 13, 2012 by Andrew Thrasher — No Comments ↓

It’s always makes for an interested day when we get an FOMC announcement. Yesterday, as I’m sure you already know, the Fed essentially dropped its dual mandate and said their concern is squarely set on unemployment.

The market rallied on the announcement, but after Bernanke’s press conference and Q&A was underway traders began to sell, causing the major indices to be nearly flat for the day. This price action caused two interesting candlestick formations to appear in the S&P 500 and Russell 2000.

First up is the iShares Russell 2000 ETF ($IWM). We started the day with a gap higher only to retreat with a close below the day prior’s low. This creates a bearish engulfing pattern as yesterday’s price fully ‘engulfed’ Tuesday’s candlestick. This type of pattern typically occurs at the top of a trend due to the shift in sentiment occurring after a morning gap higher only to be stamped out by bears.

Next we have the S&P 500 ($SPX). Equity bulls were able to take us higher as described above after the FOMC announcement, only to close just slight above the open. This price action created a large wick for the day’s candle (sometimes called a tail or shadow). While the bears weren’t able to get the close to be under the open, a mild version of the shooting star formation was still created.

Both of these patterns are in favor of the bears on a very short time frame. Single candle patterns are unlikely to sway intermediate or long-term traders/investors but are still interesting and should be observed nonetheless. We’ll see if today’s action is able to confirm these setups by pushing down large and small caps further or if equity bulls will recover and retake the reins.

Things That Make You Go Hmmmm

Posted on August 8, 2012 by Andrew Thrasher — No Comments ↓

I’ve got a lot on my plate and on my mind this morning but I wanted to put up these charts and give an idea of what I’m looking at since I didn’t post anything yesterday.

It’s times like these where having an investment plan is extremely important, emotion can destroy an investment account and keep you up at night. This current market environment has been making me go back and forward in developing an opinion. On one hand the charts just look ugly but on the other I must respect what the price action is telling me and not try to fight Mr. Market.

First up is a chart of the S&P 500 with the %B indicator which shows us where price is relative to its upper and lower Bollinger Bands. I’m using here the 65-day Moving Average with the bands set at 2.5 standard deviations above and below the MA. As you can see from the two dotted lines, when the %B gets to 0.94, we’ve seen some weakness in the market since 2010. We are currently at 0.93, but this is not an exact science as you know.

Next up is the buying and selling pressure of the S&P 500 which I’ve looked at a few times (like here for example). The green line represents buying volume, which has been falling while the S&P has made higher highs.

Next we have the Dow Industrial Average and the Dow Transports. Typically these two move together, but currently transports have broken away from the Dow in creating new highs. This is something Dow Theorist look at for buy and sell signals, but I won’t get into all that criteria today.

I thought I’d end on a positive note, I had been noticing that the cyclical index had been diverging from the S&P 500, but recently it has popped up, confirming the price action and cancelling out the divergence. Small caps (not shown) also had a positive day yesterday, breaking above IWM’s falling trendline.

Technical analysis is not an exact science. The participants in the market are always changing and the technology is always evolving. There will never be a single chart that acts as the holy grail. I’m worried about equities at this point but like I said, we must respect the price action in front of us.