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SPX Volatility and Bollinger Bands

Bollinger Band Squeeze


The Bollinger Band Squeeze is a popular trading band indicator that occurs when volatility falls sharply toward low levels and the width of the Bollinger Bands narrow. The indicator suggests after periods of low volatility there will be periods of high volatility. The contraction of volatility, as evidenced by the narrowing of the top and bottom of the Bollinger Bands hints at a sharp move, often accompanied by a breakout or breakdown of a sideways range.


Daily Bollinger Bands


SPX Bollinger Bands have contracted as depicted by the top of the bands (3,639.93) declining sharply and the bottom (4,377.76) rising sharply. A Bollinger Band Squeeze will likely develop in the next few weeks. Interestingly, the intraday low yesterday (4,381.34 - 4/12/22) rebounded from the bottom of the bands. Today, SPX reversed above the 50-day ma (4,222.32). The challenge is for SPX to surge convincingly above the middle of the bands (4,505.34), which also coincides with 200-day ma (4,494.79). The ability to clear this resistance signals a retest of critical resistance at 4,595-4,637 (2/2 and 3/29/22 highs and top of the Bollinger Bands). A breakout confirms the next sustainable rally to the 1/4/22 all-time high (4,818.62). On the downside, failure to maintain 4,378-4,381 warns of a decline toward 4,233-4,306 (Jul, Sept, Oct 2021, and late-Jan 2022 lows), and below this 4,114.5-4,158 (Feb/Mar 2022 lows). Violation signals a significant SPX sell-off.


The Bollinger % B indicator is trading at 0.27 as it nears the lower end of its trading range, implying an oversold condition. The ability to find support, coupled with a surge above the 20-day ma (grey dash line at 0.5) signals a rally to 1.0% (overbought levels).


Low volatility or tightening of the bandwidth hints at rising prices. High volatility or widening of the bandwidth warns at lower prices. The Bollinger Bandwidth short-term breakdown suggests a retest of the Aug/Nov 2021 lows. The ability to find support coupled with a strong rebound may trigger the next SPX rally to pivotal resistance at 4,595-4,637 (2/2 and 3/29/22 highs).


SPX correction or Bear Decline?


The SPX bull rally from 3/23/20 to 1/4/22 has resulted in 2,626.76 gains or +119.84%.


Is the recent increase in market volatility signaling a market top and the transition toward a bear market decline? Or is this another consolidation before the resumption of the bull trend?


Since peaking at 4,818.62 on 1/4/22, three waves of selling warn of an impending inflection. Also, another Bollinger squeeze is developing, evidenced by the sharp contraction within the Bollinger Bands.


The past 17 corrections showed common characteristics:


(1) Prior corrections averaged around 2-3 months.


(2) Excluding the 2/19-3/23/20 pandemic bear decline (-35.41%), the 17 corrections have averaged 6%.


(3) All of the corrections fell to the bottom of the Bollinger Bands before recovering. The bottom of the SPX Bollinger Bands is currently residing at 4,377.76.


(4) The past corrections also consistently whipped their 50-day ma, briefly violating the influential short-term moving averages before resuming their uptrends. The SPX 50-day ma is 4,422.32.


(5) The previous corrective phases did not violate the pivotal 200-day ma. Currently, SPX has broken its 200-day ma (4,494.79). A death cross sell signal has also developed as the 50-day ma crossed below the 200-day ma.


(6) Except for the Feb-Mar 2020 bear decline, a series of higher-low patterns set the stage for the resumption of the primary bull trend.


Will the recent three corrections of -12.37% (1/4-1/24/22), -10.46% (2/2-2/24/22), and -5.52% (3/29-4/12/22) alleviate an overbought condition and set the stage for the resumption of the primary uptrend?


Or has the buy-on-dips been replaced with the sell-on-rallies, as evidenced by the recent lower-low and lower-high patterns?


Source: Chart courtesy of StockCharts.com


Source: Chart courtesy of StockCharts.com

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