Thursday, June 05, 2014

Tracking Market Strength and Weakness With Bollinger Bands

I've been playing around with the StockCharts website and so far have been favorably impressed.  The site does a particularly good job of enabling users to create custom stock screenings.  There is also very regular and useful market commentary.

One indicator I'm tracking is the number of NYSE stocks closing each day above their upper Bollinger Bands (red line) and below their lower Bands (green line).  Those data from the past month are charted above, as of yesterday's close vs. SPY.

I generally like to have a few new things to track at all times, with the frank recognition that the majority of technical tools will provide little or no value above and beyond a consideration of past price action.  The Bollinger measure strikes me as a tool with potential in identifying thrusts from breakouts that might be likely to continue and also to identify turning points when fresh price highs or lows are accompanied by divergences in the Bollinger numbers.

You can see, for instance, that--despite recent price strength in SPY--fewer shares have been closing above their upper Bands and the number closing below their lower Bands has percolated higher.  I'll be watching over time to see if there is predictive value in such patterns.

Further Reading:  The Psychology of Quant Analysis