I have seen several types of price behavior with the BBs. First, the upper, middle (MA), and the lower BB can act as a point of short term resistance much of the time. This is where for instance the price can move up from its lower BB back to its MA, hesitate there and then keep moving up, or bounce off of the MS to go back down. Of course this dewpends on what MA you choose for your Bollinger Bands.
When the price of the stock arrives at an upper or lower BB, one of two things will happen. The price can bounce off of the BB to reverse direction. This is where the BB is acting as a support, if lower BB, and a resistance, if upper BB. The other possability is that price can keep moving past its BB. This is where the BB is acting more as an OB/OS indicator instead of a point of support or resistance. IMO an even better way to look at this is by seeing the BBs as being an "elastic" points of resistance or support for the stock. When the price continues moving after it meets its upper BB, I find that the stock usually was already in a strong runup or run down, and this is indicative of very strong short term strength of the stock. Rarely do I find the price of the stock close outside of its BBs for more than a couple days. The price may trade and even open outside the band, but it usually closes at least just inside its BBs. Now the stock may continue its run up, but it then in many cases it appears to "ride" the BB up. So the change in standard deviation of the price from its moving average is describing the price action of the stock in this way. Of cours there are exceptions. And I find the smaller cap stocks can spend more time outside of their BBs and even can move further away from them than I would expect.
One indicator that many short term traders appear to use with the BBs is an OB/OS indicator like the Stochastics. They see this OB/OS indicator telling them the probability of the price continuing its direction after it has met its Bollinger Band. So if they see the stock is OB, then the price of the stock is likely to bounce off of its upper BB. If the Stochs indicator is not OB, then the stock is more likely to continue after it has hit its upper BB. When the stock hits its Bollinger Band, many times I have seen the stock price react to the Bollinger Band before it continues its direction. This can mean for instance the price of the stock can back off a bit and then continue at less steep of a slope. This is where it can "ride up" its upper Bollinger Band but still predominantly stay within its BBs. The same can be said of the price of the stock with respect to its lower BB. As with the smaller cap issues, the price action of some stocks does not behave this way with respect to its BBs.
Now some say in the above example that the upper BB will act as support once the price passes it. I have never seen this happen. But perhaps for smaller cap stocks this can happen. But this is where a technician needs to understand the priciples of S&R and OB/OS to understand what is at work with the price action of a stock around its Bollinger Bands. So in this sense, the BBs act like a different form of OB/OS indicator more then strictly a S&R, but still can share qualities with a S&R line. In this picture, I do not think it would be correct to see that the upper BB can act as support. This is strictly a property of a line of resistance that is passed through. For that matter,
once the price passes through a resistance line, it can continue and not come back for a great length of time. But with BBs, the price does in the short run return back to close between its BBs.
As mentioned before, the BB can also be used as a dynamic measure of the volitility of a stock. This is imortant because when the bands are widening, there are more trading opportunities. When the bands are contracting, there are less trading opportunities. However, the longer term investor can see this as a contraction of a trading range that precedes a breakout that they are looking for. So it depends where you stand as a trader or investor that will determine how you will interpet the price action wrt its BBs.
So the BBs can be a very versitile tool, particularily for the trader. Now of course, there can be an entire discussion just on the use of that OB/OS oscillator in analyzing the price action of the stock. Martinn Pring covers this in detail in his "Market Momentum" book.
Hope this helps.
Any comments?
Bob Graham |
