U.S. stocks traded within a tight range hovering near their break-even levels as investors digested the employment numbers and the minutes coming from the recent FED meeting. By the end of the day, most major US indexes rose to end the day with the bulk of the moves again coming from the big tech stocks. Volatility remains an important technical indicator as SPX challenges its all-time high of 3,393.52 established on 2/19/20.
Bollinger bands Indicator
One of the better volatility indicators is the popular Bollinger bands. To refresh your memories, Bollinger bands are basically volatility trading bands. These bands automatically change as volatility increases and as volatility decreases. The bands tend to widen when volatility increases and contracts when volatility decreases. The middle of the bands is a key moving average typically a 20-period ma. The top and the bottom bands are 2-standard deviations above and below the moving average. Since the bands capture 80-90% of the price actions, a move outside the bands is often a significant development signaling a technical breakout or a technical breakdown.
Two other technical indicators are often accompanied by the Bollinger bands study – Bollinger bands width and the Bollinger % band indicators.
Bollinger bands Width Indicator
The Bollinger band width indicator displays the width between the upper and the lower bands. The concept is the bands will often expand or contract based on the type of market volatility. A rising trend suggests volatility is rising which often translates into lower stock prices. On the other hand, a declining line implies volatility is falling or higher stock prices.
Bollinger % B Indicator
The Bollinger % B indicator provides a technical measure to evaluate the three Bollinger lines (Upper, middle, and lower bands) from an oscillator perspective. This will help to determine overbought and oversold conditions. The middle line is the 20-day ma. The Bollinger % B indicator depicts how far prices have moved above and below the middle line. Overbought typically occurs at a level of 1.0 and higher and oversold occurs at -0.40 and lower.
Since the Mar 2020 bottom, SPX continues to trend higher. This is bullish and basically in line with the Bollinger bands which is also trending up. However, SPX is now nearing an all-time high (3,393.52 - 2/19/20). It is also approaching the top of the Bollinger bands (3,439.15) which is the key resistance. The ability to breakout above 3,393.52-3,439.5 would confirm the next sustainable SPX rally. On the downside, repeated failures to clear convincingly above the 3,393.52-3,439.15 also warns of the potential for the next consolidation. Based on the Bollinger bands key initial trading support is associated with the middle of the Bollinger bands at 3,21.58. Violation here opens the door for a decline toward the bottom of the Bollinger bands at 3,204. It is also interesting the 50-day ma is also rising near the bottom of the bands at 3,213 providing additional key support. Violation of 3,204-3,213 would warn of a deeper correction toward the 200-day ma (3,071.87).
The Bollinger % B indicator is at 0.77. This suggests SPX is trading at moderately overbought levels. Based on the positioning of this indicator to the 20-day ma is at 0.5 we would not be surprised to see a minor SPX pullback before a breakout to all-time highs. This breakout would then reaffirm the indicator trading back to extremely overbought levels near 1.0-1.1%.
As a general rule, lower volatility or a tighter band width support higher prices. Rising volatility or a wider band width warns of lower stock prices. The Bollinger band width remains relatively low and this supports the basis for the continuation of the SPX rally possibly to new all-time highs. We recommend investors and traders watch for a sharp rise in the Bollinger band width as this may trigger the start of the next major SPX correction.