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Second, there was a bounce back above the middle band. Third, the stock moved below its January low and held above the lower band. Even though the 5-Feb spike low broke the lower band, Bollinger Bands are calculated using closing prices so signals should also be based on closing prices. Fourth, the stock surged with expanding volume in late February and broke above the early February high.
M-Tops were also part of Arthur Merrill's work that identified 16 patterns with a basic M shape. According to Bollinger, tops are usually more complicated and drawn out than bottoms.
Double tops, head-and-shoulders patterns, and diamonds represent evolving tops. In its most basic form, an M-Top is similar to a double top. However, the reaction highs are not always equal.
The first high can be higher or lower than the second high. Bollinger suggests looking for signs of non-confirmation when a security is making new highs. This is basically the opposite of the W-Bottom. A non-confirmation occurs with three steps. First, a security creates a reaction high above the upper band. Second, there is a pullback towards the middle band.
Third, prices move above the prior high but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal. Final confirmation comes with a support break or bearish indicator signal. The stock moved above the upper band in April. There was a pullback in May and then another push above Even though the stock moved above the upper band on an intraday basis, it did not CLOSE above the upper band.
The M-Top was confirmed with a support break two weeks later. Also, notice that MACD formed a bearish divergence and moved below its signal line for confirmation.
Price exceeded the upper band in early September to affirm the uptrend. After a pullback below the day SMA middle Bollinger Band , the stock moved to a higher high above Despite this new high for the move, price did not exceed the upper band.
This flashed a warning sign. The stock broke support a week later and MACD moved below its signal line. Notice that this M-top is more complex because there are lower reaction highs on either side of the peak blue arrow. This evolving top formed a small head-and-shoulders pattern. Moves above or below the bands are not signals per se. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness.
Momentum oscillators work much the same way. Overbought is not necessarily bullish. Sometimes the price is trending and the Bollinger bands are expanding and sometimes the Bollinger bands are contracted and the price is in a narrow range. At times of contracted Bollinger bands, there is very low Bollinger band range. This is also called a Bollinger band squeeze. Once the squeeze occurs price tries to break out above or below the tight range and this is a trading opportunity catching the breakout.
Bollinger Bands Trading Strategy: You can unlock the AFL using any of the share buttons below. This is the standard EMA formula. In this first part of our 3-part series we calculated Simple Moving Average, Bollinger Bands, and Exponential Moving Average technical analysis indicators for our sample historical data set.
We found that the selections we listed below provide invaluable fundamental information on using technical analysis and Excel-based trading idea generation, testing, and execution. Combining material described in these books will enable you to develop and test your own trading systems and take them to markets sooner and with more confidence.
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