Navigating the market with Bollinger Bands and other technical indicators

I don't often step back to explain all the methods that investors and traders use to measure and navigate the markets. Here's a quick look at the Bollinger Bands and a few other technical indicators. The Bollinger Bands when set at 20,2 have a midline at the 20-period moving average. Since this is an hourly chart where each bar is 60 minutes, the midline is at the 20-hour moving average (MA).

The "2" refers to standard deviations and measure the relative volatility around the midline MA. For more information on Bollinger Bands, check out the very good Chart School at Stockcharts.com (included in the "other sites" listed at the right side of the page here).

The Bollinger Bands (BB) can help size up a market when other methods aren't crystal clear, such as whether an Elliott Wave needs one more push up or down. For that matter, some traders use BB's as their main method. So use what works for you. Notice that on this chart, from the Friday highs that pushed up the upper BB, the SPY dropped down pushing the lower BB on the Monday/Tuesday lows. Then there was the fast rebound to the upper BB again - and then another drop.

A trending market will tend to push the upper (or lower, as the case may be) BB quite a bit before reversing. You can measure whether the market is really trending, and how strongly, using the other technical indicators. Conversely, if the market is really not trending strongly, and the indicators show weakness of the move in one direction, then the BB's can help you see when the market is likely to reverse at one of the upper or lower BB's. Similarly, the midline MA of the BB can be used because sometimes the market will pause and then "decide" either to move past the midline to the other side of the BB's, or to reverse and return back to the (upper or lower) BB. (This is why some traders simply watch the BB's along with these indicators and decide when to hop in and ride for a speculative movement.)

As for the other technical indicators that help you gauge the relative strength of the market - well, there's the RSI (relative strength indicator) of course. It's okay, especially to see real extremes, but there are others that can be easier to "read" and use. The StochRSI is relatively fast moving - especially when set on the default (14); I normally reset it to (21) so it signals less frequently (less whipsaw). The OBV also indicates strength of movement, and if you've read about my use of the OBV at my trading education site (NoBullNoBearNoBias.blogspot.com, you can use the links at right) then you know I've got it on a special setting that helps further "see" the strength of move. Similar comments about MACD and the SlowStochastics. You can always learn more about all these at Stockcharts.com.

You can see that other factors play in too. The 50-period MA is widely watched and used, along with the 200-period MA. And then of course there are Fibonacci, cycles, etc. But this is just to point out that you should set up your trading charts to include Bollinger Bands along with other indicators of technical strength to help see what's happening.

I'm not able to keep a close eye on the markets intraday - well, at least I cannot guarantee that, and especially not for all markets I try to follow. So, I use these indicators when looking at the daily and weekly charts, along with the cycles and Fibonacci and Elliott Wave techniques. But if you are watching the markets intraday, I certainly encourage you to watch and use these indicators.

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* Interesting posts linked in via Wikinvest on this post. I wonder if a different post at Simoleon Sense (3/3/2009) - Using The Back Of A Napkin To Understand The World - explains explain why I'm so charts-oriented for navigating the markets!