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Strategies & Market Trends : Ask Vendit Off-Topic Questions -- Ignore unavailable to you. Want to Upgrade?

To: Gush who wrote (2680)	12/16/2004 5:00:14 AM
From: Walkingshadow	Read Replies (1) \| Respond to of 8752

Hi Gush, Sorry... "BB" means Bollinger bands. I like to use these a lot. The top "rail" of the Bollinger band usually represents an area of relatively overbought conditions, and the bottom rail is an area of relatively oversold conditions. But BBs provide more than an indication of relative overbought/oversold conditions. For example, if you study BBs, you will find that the width of the BBs is not constant, but tends to wax and wane. With some stocks or indexes, this is quite marked. With others, it is less obvious or not significant. On Stockcharts.com, you can dial in an indicator that will quantify the width of the BBs, and plot that with respect to time: stockcharts.com[w,a]daclyyay[dd][pd20,2][vc60][iLyb20,2.0]&pref=G BB width is most useful as an indicator when it gets to extreme levels. For example, in the chart of QQQQ above, a BB width of greater than 4 or less than 2 is an unstable condition that must revert back towards the normal range. Readings above 4 or below 2 are never maintained for very long. The lower the reading, the greater the contraction of the BBs. With some stocks, this waxing and waning can be very periodic. But in general, when the BBs become extremely contracted, then the likelihood that the BBs will be "blown open" explosively becomes very high. Contracted BBs can be blown open ONLY by the stock pushing hard and fast against one rail or the other. In general, the clues as to which way this resolution might occur comes from other aspects of the chart.... is the stock in an uptrend, or a downtrend? Is it currently in a basing pattern that is a pause in that trend? The point at which the move takes places can sometimes be anticipated. This chart for GOOG is maybe not such a good example, because the trading history is short. So, it is hard to know what constitutes a normal BB width for GOOG. stockcharts.com[w,a]daclyyay[dc][pd20,2!b50][vc60][iLyb20,2.0]&pref=G Notice in this chart of GOOG that the stock has been moving sideways in a cosolidation pattern, and as it has done so, the BBs have become increasingly contracted. And notice that the move that appears ready to open the BBs began when GOOG ran right into the 50 day sma. This is roughly equivalent in this case to the 40 day ema: 139.142.147.218 So the general rule is that if a stock is trading sideways, and the BBs are getting increasingly contracted, when the stock encounters a key support level such as a rising moving average, that is a likely place for a strong move to begin that will ultimately blow open the BBs. (the same is true for a downtrending stock that encounters a downsloping moving average, but everything is reversed, and the BBs will most likely get blown open to the downside). Sometimes, you can use the BB width to identify highly unusual conditions that must resolve towards the norm, and can make predictions accordingly. For example, note the extreme "blip" in the BB width in this chart for TOM. stockcharts.com[w,a]daclyyay[dc][pd20,2][vc60][iLyb20,2.0]&pref=G Carefully examine how that was resolved. I think you can see that one might have predicted that the "blip" would most likely resolve by the stock moving up and away from the lower BB rail, which would in turn cause a contraction of the BBs back towards more normal values. Keep in mind, however, that resolution of abnormal BB widths can often occur by very different mechanisms. It is important to see the possible mechanisms by which the conditions can be resolved. For example, BBs that are extremely wide in an uptrending stock can be resolved by the stock moving either sideways, or down, or even sharply down, or by the stock moving up but in a much more gradual fashion, depending on how wide the BBs are, and how sharply sloping the BBs are (or the 20 sma, which is the middle of the BBs). This is a bit hard to describe, but it is important to carefully examine each individual situation, and try to figure out the various ways that the unstable BB condition can be resolved. Then, one can often determine which of these is most probable, but this requires analysis of other chart and technical parameters, and careful analysis of the history of the stock and how it moves (its "personality"). These sorts of things tend to repeat themselves periodically. Anyway, I have found that BB width can be a useful tool. Like many such things, it is more useful with some stocks than with others. And extreme readings are associated with greater probablities and reliabilities. And, BB width should never be used alone to guide trading entries and exits. Hope this helps, Terry

To: Gush who wrote (2680)	12/16/2004 5:39:20 AM
From: Walkingshadow	Read Replies (1) \| Respond to of 8752

Hi Gush, Here's a "real-life" example of contracted BBs, and how I analyze them. I came across the chart of ISLE late Friday night. Message 20848295 I noticed that the BBs had gotten very contracted, and appeared to reverse on Friday, forming a bullish candle that day off support from the 40 sma (roughly equivalent in this case to the 40 ema). I posted that here, along with another similar chart (GRA): 139.142.147.218 Notice that the last time the BBs were contracted, the stock exploded off support (the rising 40 sma). And notice the reversal candle that formed last Thursday right on support from the rising 40 sma (this coincides with a rising trendline): stockcharts.com[w,a]daclyyay[dc][pd20,2!b40][vc60][iLyb20,2.0]&pref=G This happened in September, and very dramatically in early November, as you can see. So, I figured it was highly likely that ISLE would rally up from that support level. The extreme oversold technicals and strong buy signals corroborated that interpretation. So did the candlesticks, which were quite bullish. ISLE did indeed rally, and moved up to the upper rail as I anticipated over the past several sessions. But now it has been turned away from that rail (which tends to represent resistance). So now what? Well, the BBs are more contracted than ever, so this must be resolved soon. This can happen by the stock pushing strongly against either rail. But since the stock is in an uptrend, the likelihood is that this will be resolved by the stock rallying sharply against the upper rail, rather than failing here and pushing open the bottom rail. It doesn't HAVE to do this... the situation can also be resolved by the stock bouncing from one rail to the other, widening the BBs more gradually rather than explosively. This is possible, because the slope of the BBs is not sharply upwards, but rather just gently upsloping now. The 20 sma (which is the middle of the BBs), is in fact exactly horizontal. Generally, when the 20 sma is upsloping, the stock has a bias to trade in the upper half of the BBs, and when the 20 sma is downsloping, the stock trades more in the bottom channel. The middle of the channel (the 20 sma) represents a potential reversal point, because it is relative support or resistance. Sometimes a stock will bounce back and forth from the middle of the BBs to one rail and back in a quite periodic and orderly fashion. So with ISLE, because the technical picture is strong, and because the stock is in an uptrend, I think the upper rail of the BBs will soon get pushed open. Today's candle suggests a short term move back towards the middle of the BBs, but if that happens, that will only increase the likelihood of a powerful move up, because that will make the BBs even more contracted. Right now, the BB width is 1.92. It has only been that contracted 3 other times in the last 6 months. On each of these occasions, the contraction was resolved with a powerful push up against the upper BB rail as the stock rallied sharply: stockcharts.com[w,a]daclyyay[dc][pd20,2!b40][vc60][iLyb20,2.0]&pref=G So, my prediction that ISLE will resolve the current BB contraction in the same way is consistent with the previous history of this stock and its personality, and also has support from the technical indicators and moving average and trendline support levels. By the way, I am neither long nor short this stock, but I may take a long position soon. I would have went long on Friday or Monday, but I have too many positions as it is, and not enough time to adequately follow them and manage them. An interesting option strategy known as a straddle could be used in this kind of situation: buy both calls and puts, both at the money (possibly, in a ratio of 2 calls for every put, or maybe 3:1). Then, if I am wrong, and the stock falls apart and pushes open the bottom rail, it will probably be obvious rather quickly. Then the long positions can be closed for a loss, and the profitable short positions held and just allowed to run. This is a relatively low risk options play, based on the premise that the stock cannot go sideways with highly contracted BBs forever----it has got to make some kind of move one way or another, very likely sooner rather than later. Notice I said "relatively" low risk.... it is not always low risk, it depends on the stock and its particular chart/technical situation, and the pricing of the options. It also depends upon the expiration of the options you choose.... you must pick an expiration that allows sufficient time for the stock to move, before the time value of the options starts to decrease exponentially. Generally, that means the expiration month should be at least 3 months away, preferably closer to 6 months. A straddle will be profitable if the stock moves sharply, and relatively soon; it doesn't matter which way the move is, up or down. If the BBs have gotten gradually contracted, or if they have been contracted for a prolonged period of time, then the volatilities have probably decreased also, and that means the prices of the options contracts will very likely be cheap, since they depend upon recent volatility. Hope this helps, Terry

To: Gush who wrote (2680)	12/17/2004 4:00:45 PM
From: Walkingshadow	Respond to of 8752

Hi Gush, Here's an update on ISLE and the BBs. ISLE has corrected over the last few sessions on rather low volume to the middle of the BBs. This has only contracted the BBs further. The width of the BBs currently has dropped from 1.92 at the last post to 1.61. stockcharts.com[w,a]daclyyay[dc][pd20,2!b40][vc60][iLyb20,2.0]&pref=G Technicals show sell signals now, so that makes it more likely that the acutely contracted BBs will resolve by ISLE pushing against the bottom rail, but it is too soon to tell because it is currently testing relative support, and there is fairly good chart support below that at about 24. 139.142.147.218 I think the most likely scenario is that if ISLE trades through the middle of the BBs (that is relative support), it will proceed down to retest chart support at 24. There, a reversal to the upside is highly likely IMHO, followed by a resolution of the now acutely contracted BBs to the upside shortly thereafter. The more contracted the BBs become, the more likely an explosive resolution will occur. I am not trading ISLE at the moment, but if I were, I would be long, despite the current technicals. ISLE is, after all, in a strong uptrend, and the entire sector is very strong also. If I am wrong, the downside risk would appear to be relatively low, because if the contracted BBs get pushed open on the downside, the move will be obvious, and the stop would be just below the lower rail of the BBs. So if one were to go long here, and place a stop just below the lower BB rail at $23.75, the downside risk would be about 3%. Please understand I am only posting this because it is an interesting and hopefully illuminating stock to watch. I will probably not be able to trade ISLE, but it will be interesting to see how this evolves anyway. T

To: Gush who wrote (2680)	12/19/2004 11:20:33 AM
From: Walkingshadow	Read Replies (1) \| Respond to of 8752

Hi Gush, Here's another good example of expansion/contraction of BBs. Reid posted this chart earlier today. stockcharts.com[w,a]daclyyay[dc][pd20,2!b40][vc60][iLyb20,2.0]&pref=G 139.142.147.218 I think you can see that the BBs have expanded too far. Now they must contract, and the quickest way to accomplish that is for the stock to trade up away from that lower rail. That will pull the lower rail up, but the upper rail will also come down (but not as fast). Also, the technicals are showing buy signals, and it is extremely oversold. This is a good example of how to use BB expansion/contraction to evaluate a trade---the condition of the BBs is corroborated by the technicals, making a long position here more likely to work out well. Another corroborating factor is the volume surge when ADES traded down to the lower BB rail. This is supportive volume, and such strong relatively sudden surges in volume are typical of short-term reversal points because they indicate strong buying interest, not strong selling interest. This factor is of lesser importance in this particular case because that buying interest is almost certainly not from institutions or professionals, who own very little of the float. Most institutions cannot consider buying this stock because of the small float (4 million shares). They simply cannot acquire a big enough position to make it worth their while, and if they tried to buy, they would push the stock up by an inordinate amount unless they bought less than 5,000 shares a day or so (that's only $100,000 worth of stock). The only potential problem with this trade is the low volume, which tends to make technical analysis relatively unreliable because the chances the stock can be artificially pushed around are higher. Personally, I usually (not always) like to trade stocks that have daily volumes of at least 500K, preferably 1 million or more. The float on ADES is only 4 million, and the average daily volume only 20,000, with a current share price of $20. That means it would take only a few hundred thousand dollars to push the stock. It can be easily walked up or down by MMs (or traders) using a rather small amount of inventory. On the other hand, that makes it a potential target of momentum traders, who typically take long positions. The one ingredient missing for momentum traders is the lack of exotic technology---they are involved in mercury emissions control for utility companies. Pretty boring stuff for the mo-mo crowd. One more example, a bearish chart, looks like a blow-off top here (MSO): stockcharts.com[w,a]daclyyay[dc][pd20,2!b40][vc60][iLyb20,2.0]&pref=G 139.142.147.218 If MSO trades down, that will contract the overly expanded BBs. A pretty good short candidate in my view. T