I recently updated Incredible Charts’ Bollinger Bands page to highlight two great trading strategies:
First, if you are not familiar with Bollinger Bands here is a quick summary of basic Bollinger Band trading signals.
Bollinger Band Squeezes
The traditional way of trading the Bollinger Band squeeze is on breakout above (or below) the bands after a squeeze. Now Microsoft had been trending upward since 2012 and another advance was likely. It is important to guard against fake signals in the opposite direction, like the one highlighted in mid-September 2016.
- Green arrow = Long entry
- Red arrow = Exit
- The red candle on Friday, September 9th closed below the lower band after a narrow Bollinger squeeze, signaling a downward break, before a large engulfing candle on Monday warned of reversal to an up-trend. The primary trend would alert traders to treat shorter-term bear signals with caution but it is also advisable to use Twiggs Money Flow to confirm buying or selling pressure. Here 21-day Twiggs Money Flow is oscillating above zero, indicating buying pressure despite the downward breakout. So the trade would be ignored.
- Subsequent rising troughs on Twiggs Money Flow would give me sufficient confidence to enter the trade [green arrow] before the next breakout, with a stop below the recent low at $56. More cautious traders would wait for breakout above the upper Bollinger Band but this often gives a wider risk margin because the stop should still be set below $56. The subsequent pull-back to test support in November 2016 underlines the need not to set stops at the breakout level.
- Exit [red arrow] on bearish divergence on Twiggs Money Flow, when the second dip crosses below zero, or if price closes below the lower Bollinger Band.
Bollinger Band Trends
The second strategy is a trend-following strategy I picked up from Nick Radge’s book Unholy Grails, where he uses 100-day Bollinger Bands to capture trend momentum. The rules are simple:
- Enter when price closes above the upper Bollinger Band
- Exit when price closes below the lower Bollinger Band
Nick proposes setting the upper band at 3 standard deviations and the lower band at 1 standard deviation but I am wary of this (too much like curve-fitting) and would stick to bands at 2 standard deviations.
Here I have plotted Microsoft with 100-day Bollinger Bands at 2 standard deviations and 13-week Twiggs Money Flow to highlight long-term buying and selling pressure.
For a detailed discussion of trading signals for this chart, go to Bollinger Band Trends.
Germany’s DAX is headed for a test of resistance at the 2012 high of 7200. A trough above zero on 13-week Twiggs Money Flow indicates strong buying pressure. We should see stubborn resistance at 7200 but also strong support at 6500 if there is a retracement.
The FTSE 100 is testing resistance at 5700 while 21-day Twiggs Money Flow bottoming above zero indicates (medium-term) buying pressure. Breakout would offer a target of 5900*.
* Target calculation: 5700 + ( 5700 – 5500 ) = 5900
Dow Jones Hong Kong Index is headed for primary support at 360. Failure would confirm the primary down-trend signaled by 63-day Twiggs Momentum below zero.
India’s Sensex is testing support at 16000/15800. Failure would mean another test of primary support at 15000/15200. Reversal of 13-week Twiggs Money Flow below zero indicates selling pressure. Failure of primary support would offer a target of 12000*.
* Target calculation: 15 – ( 18 − 15 ) = 12
Dow Jones Singapore Index broke medium-term support at 222, indicating a test of primary support at 208/210. Reversal of 13-week Twiggs Money Flow below zero indicates selling pressure. Failure of primary support would offer a target of 190*.
* Target calculation: 210 – ( 230 − 210 ) = 190
The BSE Sensex found medium-term support at 16000/15800 but reversal of 13-week Twiggs Money Flow below zero warns of further selling pressure. Expect another test of primary support at 15000/15200. Failure would offer a target of 12000*.
* Target calculation: 15 – ( 18 − 15 ) = 12
With almost half of foreign bank funding sourced from Europe, India is experiencing significant tightening of external finance and hence domestic investment.
Singapore’s Straits Times Index is testing medium-term support at 2750. Failure would test primary support at 2600. Reversal of 63-day Twiggs Momentum below zero warns of a strong primary down-trend. Recovery above 2900 is unlikely but would indicate continuation of the primary up-trend.
* Target calculation: 2600 – ( 2900 − 2600 ) = 2300
Some good potential breakouts on Incredible Charts screen #48888:
- China Taisan (F2X)
- Hong Leong Asia (H22)
- Amtek (M1P)
- Singapore Exchange (S68)
Most interesting of the stocks on my Potential Breakouts screen (Incredible Charts #48895):
The TSX 60 index is consolidating in a narrow band between 700 and 715. Upward breakout is likely and would signal a primary up-trend. Recovery of 63-day Twiggs Momentum above zero would strengthen the signal. Target for the initial advance is 790.
* Target calculation: 720 + ( 720 – 650 ) = 790
A screen of stocks with low Momentum but high buying pressure, as indicated by 21-day Twiggs Money Flow, reveals a list of 93 potential breakouts (after filtering out stocks with daily Value/Turnover traded of less than $1 million). Husky Energy [HSE], Crew Energy [CR] and Bank of Nova Scotia [BNS] are three that look interesting.
SGX stocks with low 63-day Momentum but strong buying pressure as measured by 21-day Twiggs Money Flow. Illiquid stocks filtered out using $500,000 daily Value/Turnover filter.
Top Momentum stocks identified using 63-day Twiggs Momentum and $500,000 daily Value/Turnover filter:
Australia’s ASX 200 index fell sharply Monday. Bearish divergence on 13-week Twiggs Money Flow warns of strong selling pressure. Failure of medium-term support at 4000 is likely, while breach of the primary level at 3850 would signal a decline to 3350*.
* Target calculation: 3850 – (4350 – 3850 ) = 3350
South Korea shows a similar pattern, with the Dow Jones index testing medium-term support at 380 following bearish divergence on 13-week Twiggs Money Flow. Breach of primary support at 350 would signal a primary decline to 280*.
* Target calculation: 350 – ( 420 – 350 ) = 280
The S&P 500 index is headed for medium-term support at 1160. 21-Day Twiggs Money Flow warns of (medium-term) selling pressure. If support at 1160 fails, primary support at 1075/1100 is unlikely to hold — offering a target of 900*. Reversal below the rising trendline on 63-day Twiggs Momentum would indicate continuation of the primary down-trend.
* Target calculation: 1100 – ( 1300 – 1100 ) = 900
Dow Jones Europe index is also headed for primary support, at 205. Failure is likely and would offer a target of 160*. Reversal of 13-week Twiggs Money Flow below zero would warn of rising selling pressure.
* Target calculation: 210 – ( 260 – 210 ) = 160
Dow Jones Industrial Average reversed below short-term support at 12000. Bearish divergence on 21-day Twiggs Money Flow warns of medium-term selling pressure — and a correction to test primary support at 10600. Reversal (of TMF) below zero and follow-through (of DJIA) below 11900 would strengthen the signal.
The SENSEX is testing primary support but has so far (Tuesday 12:30 p.m.) held above 15800. Breakout would signal a primary decline to 14000*. The peak below zero on 13-week Twiggs Money Flow warns of strong selling pressure.
* Target calculation: 16 – ( 18 – 16 ) = 14
The Shanghai Composite index broke primary support at 2300 Monday, signaling a decline to 2100*. Follow-through on Tuesday would strengthen the signal. The sharp fall on 13-week Twiggs Money Flow warns of strong selling pressure.
* Target calculation: 2300 – ( 2500 – 2300 ) = 2100
Hong Kong’s Hang Seng Index held above 18500 Monday, but another test of medium-term support at 17500 is likely.
Respect of the descending trendline on Canada’s TSX 60 weekly chart indicates another test of primary support at 645. Failure would signal a primary decline to 575*. Breach of the zero line by 63-day Twiggs Money Flow would warn of rising selling pressure. Breakout above resistance at 715 is unlikely but would flag that the primary down-trend has ended.
* Target calculation: 645 – ( 715 – 645 ) = 575
Dow Jones Industrial Average is testing resistance at 12300. Breakout would signal a primary advance to 13400 and an end to the bear market. Rising 63-day Twiggs Momentum is encouraging but will only be significant if retracement respects the zero line.
* Target calculation: 12300 + ( 12300 – 11200 ) = 13400
The Nasdaq 100, however, displays a large bearish divergence on 13-week Twiggs Money Flow, warning of selling pressure. Reversal below 2040 would confirm a primary down-trend. Breakout above 2400 is less likely, but would suggest an advance to 2800*.
* Target calculation: 2400 + ( 2400 – 2000 ) = 2800
Dow Jones Shanghai Index respected resistance at 320 and is now testing support at 285. Failure would offer a target of 260*. 63-Day Twiggs Momentum deep below zero continues to signal a strong primary down-trend.
* Target calculation: 290 – ( 320 – 290 ) = 260
DJ Hong Kong index is testing medium-term support at 360. Failure would mean a re-test of the primary level at 320; respect is less likely but would indicate another test of 410. Declining 13-week Twiggs Money Flow below zero warns of selling pressure.
The ASX 200 index is once again testing resistance at 4350. Rising 21-day Twiggs Money Flow indicates medium-term buying pressure. Breakout would signal a primary advance to 4700*. Respect of resistance is less likely, but would suggest another test of primary support at 3850.
* Target calculation: 4350 + (4350 – 4000 ) = 4700
The All Ordinaries is similarly testing resistance at 4400, while rising 13-week Twiggs Money Flow indicates long-term buying pressure. Breakout would offer a target of 4800*.
* Target calculation: 4400 + ( 4400 – 4000 ) = 4800