Tuesday, January 24, 2012

Bollinger Bands in a Platform Market Condition

MetaStock SPRS Series - Week 52 - TechniTrader® Stock Discussion for MetaStock Users: FFIV - Bollinger Bands in a Platform Market Condition - January 23, 2012
By: Martha Stokes C.M.T.

There is no doubt about it: sideways price action gives most traders headaches, weaker picks, and disappointing results. Learning to use the proper indicators during sideways markets is key to having strong profits in a sideways market.

Most traders lack good Spatial Pattern Recognition Skills and therefore, are at an extreme disadvantage in the platform market, which is a tighter sideways pattern than a trading range but not as tight as a consolidation. The platform often confuses traders and many try to swing trade platforms with whipsaw results.

The markets have shifted now as expected, to a platform market condition. You can see the rise in numbers of stocks that explorations pull up from the RSI, Consolidation, and Bottoming scans, which shows the shift from the Trading Range Market Condition to the Platform Condition.

Platform Building Markets are conservative markets where there are only a few of the 9 levels of market participants actively investing or trading the markets. These are periods when speculation is less and value-oriented investing rises.

For Technical Traders, this can be a big plus as it makes it easier to ride position style trades for several weeks yielding significantly higher gains than either daytrading or swing trading styles.

Position trading a platform market requires a modification to the indicators you should use. Momentum style indicators will give false signals and create plenty of whipsaw trades that can erode your capital as well as your confidence.

Instead, choose indicators that are suited for the dominant patterns of the platform markets.

One such indicator is Bollinger Bands.

Bollinger Bands are very popular and can be an additional tool to make stock pick selection faster, easier, and far more reliable, especially in a platform building market.

Prior to breakout moves from platforms, the price action tends to compress. Bollinger Bands can help you see these compressions before price runs or gaps out of the platform. By seeing these patterns early, both position traders and swing traders can enter before price moves.

FFIV has an excellent compression pattern.

Without Bollinger Bands, this compression is harder for most traders to see. By applying the Bollinger Bands and using TTVA, we can see that the stock is heading for a breakout pattern. This is a challenge of the recent highs of early 2011 spring.

Chart 1

By applying Bollinger Bands, we can clearly see the compression pattern over the past couple of days. Instead of a wider sideways pattern, we have a consolidation forming right at the recent tested highs of November.

The tighter the compression of the Bollinger Bands, the bigger the move.

FFIV is a watchlist stock for TechniTrader® students.

Chart 2

The weekly chart shows strong accumulation over the past couple of months since the bottom. Volume is biased to the upside. The sell down was swift and dominated by HFTs and pro trader large lot activity that evaporated very quickly as institutional investors moved in suddenly.

Let’s follow this stock over the next few days to weeks to see how it performs after this compression pattern.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

No comments: