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60 Part IV: Bollinger Bands with Indicators  Figure 20.1 DJIA with 4 percent bands and advance-decline oscillator. MACD is used to create an advance-decline oscillator for timing with percentage bands. Choosing the departure technique also means that you can use the widely available MACD calculations to create the oscillators (Figure 20.2). Set the first MACD parameter to 21, the second to 100, and the third to 9. This sets the period for the short-term average to 21 days, sets the period for the long-term average to 100 days, and leaves the period for the signal line at the default, 9 days. The data inputs are advances-declines and up volume-down volume. If the program you are using wants the inputs in percentages, the first should be 9 percent, the second 2 percent, and the third 20 percent.2 Now substitute Bollinger Bands3 for the percentage bands and you have the core of a very useful reversal system for timing markets. In a similar vein we can use indicators to clarify tops and bottoms and confirm reversals in trend. To wit, if we form a W2 bottom with %b higher on the retest than on the initial low-a relative W4 (Figure 20.3)-check your volume oscillator, either MFI or VWMACD, to see if it has a similar pattern.4 If it does, then buy the first strong up day; if it doesnt, wait and look for another setup.
Chapter 20: Method III: Reversals 163 -1-1- | | | | 1 r\ i / \ | 1-!-1- | - if - | | v j | | | | | | | | | | | | | | | H-1- | -1-1 | | i-i- | --1- | | 1-1-r- | | | | | | | | llllllllll | III , ll | ..Jill llliii, iiiiillllli........iiii...... | | i jin, nihil | llli | 1 1 1 1 1 | | "iip"""l | • ] | | | | | | 1 ; . ; |
5/00 6/00 7/00 6/00 9/00 10/00 11/00 12/00 1/01 2/01 Figure 20.2 DJIA with Bollinger Bands and A-D MACD histogram, the difference between the two MACD lines from Figure 20.1.  6/00 9/00 10/00 11/00 12/00 1/01 2/01 Figure 20.3 W2 (W4) with Accumulation Distribution, Dow Chemical, 150 days. AD confirms price action as depicted by %b.
Part IV: Bollinger Bands with Indicators The logic at tops is similar, but we need to be more patient. As is typical, the top takes longer and usually presents the classic three or more pushes to a high. In a classic formation, %b will be lower on each push, as will a volume indicator such as Accumulation Distribution (Figure 20.4). After such a pattern develops, look at selling meaningful down days where volume and range are greater than average. What we are doing in Method III is clarifying tops and bottoms by involving an independent variable, volume, in our analysis via the use of volume indicators to help get a better picture of the shifting nature of supply and demand. Is demand increasing across a W bottom? If so, we ought to be interested in buying. Is supply increasing each time we make a new push to a high? If so, we ought to be marshaling our defenses or thinking about shorting if so inclined. Method III can be simplified and systematized quite easily. Instead of looking for a steady deterioration as the pattern develops, we can look for discrete opportunities. The best way to do this is to find tags of the bands where an oscillator such as a  3/00 4/00 5/00 6/00 7/00 8/00 9/00 Figure 20.4 Ml 6 (M12) with Accumulation Distribution, Lyondell, 150 days. Steadily waning %b and A-D portray a top.
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