At the moment, the KLCI is consolidating with the Bollinger Band width contracting. Will other counters consolidate like the KLCI, and what will happen after the consolidation? How should investors be prepared for the next movement after this consolidation? Let's study a few examples in detail, while we wait for the "green light" from the Bollinger Bands.
Chart 1: Scomi [7158] Technical chart from 4/2/2009 to 29/5/2009.
| Indication | Description: |
| A | The Bollinger Band width re-expanded on 23/3/09, (expanded 66%), with the price of Scomi above the Bollinger middle band, and therefore, a bullish signal suggesting more upside movement biased. After that, price of Scomi consolidated again, but was supported at the Bollinger middle band. |
| B | After consolidating for around 1 week, the Bollinger Band width re-expanded again on 13/4/09, while price was still above the Bollinger middle band, with substantial increase of volume. Therefore, this was another bullish signal for Scomi. Soon, price consolidate again but still supported by the Bollinger middle band, suggested that the price was still trending up. |
| C | On 6/5/09, the Bollinger Band width expanded 34%, with price above the middle band with strong volume, and therefore, yet another bullish signal for Scomi. The strong volume suggested more inflow of fresh capital, thus the buying interests was stronger. |
| D | Since arrow C, price of Scomi has gone up 60%, and reached a resistance at RM0.80 level; price started to correct then, as the Bollinger Bands contract, suggesting a consolidation for Scomi. Other suggesting a consolidation, the contraction of the band width also implies that price of Scomi is now preparing for a new movement, and the direction of the new movement shall only be revealed when the Bollinger band width re-expands. If the Bollinger bands should expand with the price above the Bollinger middle band, it would be another bullish biased movement; if the Bollinger should expands with price below the Bollinger middle band, it would be a bearish biased movement. |
Chart 2: KNM [7164] Technical chart from 4/2/2009 to 29/5/2009.
| Indication | Description: |
| A | 23/3/09, the Bollinger band width expanded 30%, with the price of KNM above the Bollinger middle band; therefore, a bullish biased signal. Despite some pullback, price of KNM remained supported at the Bollinger middle band. |
| B | Bollinger expanded again with price of KNM above the Bollinger middle band. Together with the increased of volume, this suggested another bullish biased movement for KNM. |
| C | After a quick consolidation, the Bollinger band width expanded 82%, while price of KNM was still above the Bollinger middle band with substantial volume, therefore, breaking above the RM0.595 resistance, and marked a new high. Price rose about 30% and hit its resistance at RM0.855 level, and then, the Bollinger band width started to contract, suggested that price of KNM was to consolidate again. |
| D | As indicated by B, the Bollinger band width of KNM re-expanded after consolidating for over 1 week, with strong volume, and breaking above the RM0.855 resistance. Therefore, this is another bullish biased signal suggesting that KNM is resuming its uptrend. Provided that the Bollinger is still expanding with the price being supported by the Bollinger middle band, the upside biased movement is expected to continue. |
Chart 3: UEMland [5148] Technical chart from 4/2/09 to 29/5/09.
| Indication | Description: |
| A | Price of UEMland broke above the T1 downtrend line on the 23/3/09, together with the Bollinger band width expansion, therefore, it suggested that the downtrend has ended and price started to reverse. Despite a quick pullback, price of UEMland rebounded from the Bollinger middle band and T1. |
| B | On 13/4/09, the Bollinger band width expanded significantly with price of UEMland above the middle band. On the same day, volume also increased substantially, suggested some inflow of fresh capital, thus confirming the bullish biased movement signal. |
| C | On 29/4/09, the Bollinger band width re-expanded again after its contraction, with price of UEMland remained above the Bollinger middle band, thus another bullish biased movement signal. Price resumed its uptrend, broke new high. |
| D | After a consolidation for about 1 week, the Bollinger band width re-expanded 28% on the 22/5/09 with price of UEMland remained above the Bollinger middle band, together with strong volume, and as a result, price rose sharply but resisted at RM 1.70 level. As of 29/5/09, despite the intra-day price of Friday touched all the way to RM 1.75, it failed to close above RM1.70. Therefore, resistance for UEMland is still at RM1.70. Although the Bollinger band width is still expanding, the rate of expansion is insignificant, and therefore, this suggests that the Bollinger bands might be contracting soon, thus suggesting another consolidation for UEMland. If the Bollinger Bands width should re-expanded significantly with the price of UEMland above the middle band, it would be another bullish biased signal, suggesting a resume of the uptrend. On the other hand, if the Bollinger band width should re-expand with the price of UEMland below the middle band, it would be a bearish biased movement signal for UEMland. |
Here are a few more stocks with the Bollinger Bands contracting:
| Code | Name | Bollinger Band Width | Price Above / Below the Middle Band. |
| 3417 | E&O | Contracting | Below |
| 4235 | Lionind | Contracting | Above |
| 7206 | Ramunia | Contracting | Below |
| 1155 | Maybank | Contracting | Above |
| 1147 | Equine | Contracting | Below |
| 1961 | IOIcorp | Contracting | Above |
| 5398 | Gamude | Contracting | Above |
The above stocks are consolidating. If the Bollinger band width should re-expands, then the new movement should be determined by the price position above or below the middle band. It is very important for investors to consider if any of the above stocks are suitable for different types of investors before investing.
Conclusion:
It is crucial to know that when the Bollinger band contracts, it suggests a consolidation as well as a preparation of a new movement. However, investors should never attempt to buy on weakness during the consolidation for if the Bollinger band should expand with price below the middle band, there will be risk more downside biased movement.
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Source : WinChart, Straits Index (M) Sdn Bhd http://www.straitsindex.com/
