114 Part III: Bollinger Bands on Their Own

10/99 11/99 12/99 1/00 2/00 3/00 4/00 5/00 6/00 7/00 8/00 9/00 10/00 11/00 12/00 1/01 2/01

Figure 14.2 Walk up the band followed by an M top, Vishay, 350 days. Closes outside of the bands are continuation signals.

very useful in helping to diagnose periods in which price walks the band (Figure 14.3). This is because these indicators tend to act like trend descriptors in their open forms and can be compared directly with price more easily than oscillators when the market is trending. To enhance this comparison, plot II or AD in the same clip as price, but with a separate scale.

The closed forms of II or AD are very useful in that tags of the bands should be accompanied by similar action in the indicator (Figure 14.4). A tag accompanied by an opposing reading from 21-day 11% is an action signal associated with the end of a trend. Be especially careful about small divergences. It can be enough for the indicators to get into the neighborhood of their prior highs. For example, if 21-day 11% is consistently getting into the low 20 percent range on each leg up, a leg that only carries it to 19 or 20 percent may be a warning, but it is not likely a sell signal-at least not yet. The first divergences are usually just warnings that will be followed by clearer, more meaningful divergences later if a top or bottom is forming.

Chapter 14: Walking the Bands

90 80 70

25000 20000 15000 10000 5000 0

5000

H-1-1-1-1-1-1-1-1-1-1-1-1-1-1-h

6/99 7/99 6/99 9/99 10/99 11/99 12/99 1/00 2/00 3/00 4/00 5/00 6/00 7/00 6/O0

Figure 14.3 Walk up the band with Intraday Intensity, open, Texas Instruments, 350 days. Note the indicator turns down confirming price action.

Figure 14.4 Walk up the band with Intraday Intensity, closed, Texas Instruments, 350 days. Indicator positive until top forms, then negative thereafter.

Part III: Bollinger Bands on Their Own

If the average selected is well suited to the stock, that is, if it is descriptive of the intermediate trend, then it will tend to provide support on pullbacks during a walk up or down the bands (Figure 14.5). These can be excellent entry, add-on, or reentry points. As was the case with tops, these points offer superior risk-reward relationships, as you will know quite quickly if you are wrong-and the potential if you are right is great.

Often a walk up or down a band will consist of three primary legs. Many different disciplines, including R. N. Elliotts wave theory, have suggested that three legs up or down interrupted by corrections is the typical pattern within a trend (Figure 14.6); in a reaction expect two legs interrupted by one countermove.2 While these are indeed useful guidelines that can help diagnose a walk along the bands or other phases of market activity, they cannot be relied upon in an absolute manner, as the number of legs in a trend will frequently be a number other-often larger-than three. When that is the case, a weakening of the ability for price to get outside the bands will often warn that the advance or decline is in its waning days.