In other words, investors must understand the usage of Bollinger Bands especially to find out the first entry point after a consolidation, or to decide to stay on the sidelines when the Bollinger Bands width is contracting. Nevertheless, we shall cut the theory part and straight to the point with examples.
Upside biased Bollinger Bands signal:
Chart 1: TA [4898] technical chart from 24/02/2009 to 8/05/2009.
As indicated by A, TA price moved sideways with low volatility, and as a result, the Bollinger Band width contracted, suggested that price is consolidating. In other words, it also means that price is preparing for a new trend. As indicated by B, the Bollinger Band width expanded with price of TA above the Bollinger middle band, therefore, suggesting an upside biased (Bullish) signal. However, at that time, volume did not increased substantially, and therefore, it has failed to confirm the bullish Bollinger bands signal. Nevertheless, the Bollinger band width expanded again after two weeks, with the price above the middle band, as indicated by C. This time, as indicated by D, volume increased significantly, and therefore, the bullish Bollinger Bands signal was much more reliable, because the increased of volume suggested more inflow of fresh buying interests, which helped to sustain the uptrend. Afterward, the Bollinger Bands continue to expand, while price of TA continue its upside movement.
Downside Biased Bollinger Bands signal:
Chart 2: Sime [4197] technical chart from 15/05/2008 to 18/07/2008.
As indicated by A, the Bollinger Band width contracted, which is caused by the low volatility of price while moving sideways, suggested a consolidation and preparing for a new movement. It is important to note that the direction of the new movement shall only be revealed when the Bollinger Band width re-expands. After consolidated for about 2 weeks, the Bollinger Bands expanded, with price below the Bollinger middle band (as indicated by B). Therefore, the Bollinger bands has signaled a downside biased movement for Sime. Afterward, the Bollinger band width continue to expanded while price of Sime continue its downtrend.
From the above two examples, we can clearly see the characteristic of the Bollinger Bands. Whenever the band width contracts, it suggests a consolidation, when the band width expands, it suggests a beginning of a new trend, and the direction of trend shall be determined by the price above or below the middle band.
Generally, signals of the Bollinger Bands are reliable, but there are a few important conditions in order to use Bollinger Bands effectively:
1. Whenever the Bollinger Bands indicates an upside biased signal, it should be confirmed with significant increased of volume.
2. Before any expansion, the Bollinger Bands is best to have an obvious contraction. Therefore, the best time to monitor the Bollinger Bands would be during its contraction.
3. Follow the overall market trend. If the Bollinger Bands signal of an individual counter could match the broad market movement, the signals are usually more reliable.
An example of Bollinger Bands signal in the present: Maybank Berhad.
Chart 3: Maybank [1155] technical chart from 23/10/2008 to 22/05/2009.
As indicated by A, Maybank price formed a Higher-low, which was an important reversal signal that we mentioned earlier in previous article of finding the market leaders. As a result of the higher-lower formation, price of Maybank trended up and broke above RM5.00 resistance. As indicated by B, after breaking above RM 5.00 level, price of Maybank managed to consolidate above RM 5.00 and therefore, the RM5.00 is the current support. Currently, the Bollinger Bands is contracting, suggesting the Maybank is again preparing for a new movement.
As indicated by C, price of Maybank rebounded from the Bollinger middle band on the 20th of May, up RM0.25 or 5%, and therefore, the Bollinger middle is the current dynamic support. If the Bollinger band should expand with price above the middle band and increased of volume, price of Maybank is expected to move higher until another contraction of the Bollinger band width, which would then suggests another consolidation.
Nonetheless, other than the Bollinger bands signal, the sentiment of the broad market is also important for it would affect the performance of Maybank. In short, if the KLCI should continue its uptrend, there is a good chance for Maybank to move higher. Resistance for Maybank is at RM 5.90 while the RM 5.00 is its current support.
Here are a few other stocks which has potential Bollinger bands signal of breaking away from their consolidation:
| Code | Name | Bollinger Bands | Price Above or Below the middle band. | Conditions for uptrend formation. |
| 5398 | Gamuda | Expanding | Above | Expanding Bollinger band width, while awaiting more volume to confirm the bullish signal. |
| 1015 | AMMB | Contracting | Above | Continuation of its uptrend, waiting for more volume and expansion of the Bollinger Bands. |
| 7228 | TGoff | Contracting | Above | Current volume is still low, while still consolidating. Meanwhile, price is testing an important 200-day Moving Average. |
| 5122 | Kencana | Contracting | Above | Might be forming another Higher-lower, awaiting Bollinger Band width to expand with increasing volume. |
Conclusion:
The Bollinger band width will contract during price consolidation, and when price begins to move away from its consolidation, the Band width shall expand, therefore, giving a clear signal for investor to buy or to sell. When the Bollinger bands expands, the position of price above or below the middle band should determine the direction of the new movement.
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