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51

CHAPTER

BOLLINGER BANDS AND INDICATORS

The real power of Bollinger Bands becomes evident when they are combined with indicators. The indicators of choice are volume indicators, and the preferred operating mode is comparing price action within the bands to indicator action (Figure 17.1).

Price-indicator comparisons can result in either a confirmation or a nonconfirmation. An example of a confirmation is a tag of the upper band combined with a sufficiently strong indicator (Figure 17.2). If you have a long position and price tags the upper band-a situation in which many would consider selling-consult your indicator. If the indicator is sufficiently strong, take the tag to be a confirmation of your position. (If the indicator is weaker than at a prior tag, consider this an early warning signal.)

An example of a nonconfirmation is a tag of the lower band accompanied by a positive indicator reading, which constitutes a classic buy signal (Figure 17.3). For example, if you were looking



Part IV: Bollinger Bands with Indicators

Figure 17.1 BB, MFI, and normalized volume, Healthcare Realty, 150 days. Price retests its prior low, but MFI is dramatically higher-a classic positive signal.

2/00 3/00 4/00 5/00 8/00 7/00 8/O0

Figure 17.2 BB, AD%, and normalized volume, Pfizer, 120 days. Note the change in character of the oscillator as we transition from an advance to a decline.



Chapter 17: Bollinger Bands and Indicators

for a stock to purchase, and among the stocks you monitored you found one that tagged the lower band accompanied by a positive volume oscillator reading, youd have a reversal purchase candidate. If this were the second tag and therefore a potential W bottom, you would have supporting evidence for the successful completion of a reversal to a positive trend. Now all you would need is a sign of strength to confirm the reversal.

An example that is neither fish nor fowl is a band tag accompanied by a neutral indicator reading (Figure 17.4). If you are long and price tags the upper band with the indicator neutral, take that as a warning to tighten up your stops or exercise increased vigilance. If the indicator is negative, it is an outright sell signal.

A very good example of confirmations is a walk up the upper Bollinger Band accompanied by strong indicator readings (Figure 17.5). The typical sequence is that during the sustained portion of the trend, each tag of the upper band is accompanied by a strong indicator reading. As the top is approached, band



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