EOM “Technical Tuesday” 8.16.16 Bollinger Band Squeeze
Last night’s after-hour selling continued today with all three major indexes closing in the red-data from Stockcharts.com.
Today is day twenty-four of this sideways action pattern-consisting of a forty-three point, 2% spread on the $SPX (2150 – 2193). Keep in mind, there are on average twenty-two trading days in a month.Look who doubled his bet against the S&P 500. I wonder what he knows that we do not.
Tonight is “Technical Tuesday, and I feature what is termed a “Bollinger Band Squeeze.” Those of us who use Bollinger Bands watch for when the bands narrow. When this happens, picture a “Coiled Spring” gaining pressure. Eventually, it will spring, and jump one direction or the other.
Here is the chart showing the low Bollinger Band reading. Which way will it go? The CMF remains strong while the MACD Histogram is negative and the RSI and Slow Stochastics are overbought. We should know soon which indicator is giving the best readings.
On August 10, 2016 the Bollinger Band width fell to the lowest level since 1959. Research from Financial Educator Mr. Erik Conly puts this in perspective.
Mr. Conley published data on what happened to the market (he used the S&P 500 historical data from Yahoo! Finance) in the months following these historically narrow readings. Specifically, where was the market after one month, three months, and a full year after these low points in the bandwidth? Here are the results.As the table below shows, the market was in an uptrend in all six cases under review. It also shows that on average, the market underperformed its long-term averages after the low bandwidth readings were recorded. The only exception to this underperformance was the 1995 event, when the market outperformed in all three post-bandwidth time frames. (This was the beginning of the “irrational exuberance” phase of the market, and the lead-up to the tech bubble.)
Tomorrow and the rest of the week, we revisit the remaining “Worst of Breed” in the Altman Z Score-Group. Wait till you see the weakness in this group.
Enjoy your evening!
David O. England
Plan your work, work you plan, share your harvest!
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It shall in no event be construed or interpreted as an offer or recommendation to buy or sell securities of any kind.
DAVID O. ENGLAND is the founder of the Eye on the Market-Training Academy and Associate Professor Emeritus of Finance. This column is presented for educational purposes only and is not intended
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