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BOLLINGER BANDS


A Bollinger Band Contraction For RIMM

08/08/06 08:36:00 AM
by Arthur Hill

Research In Motion consolidated over the last two months, and this type of volatility contraction often precedes a directional move.

Security:   RIMM
Position:   Accumulate

Figure 1 shows Research In Motion (RIMM) with the Bollinger Bands. The middle band is the 20-day moving average, the upper band is two standard deviations above the middle band, and the lower band is two standard deviations below. The moving average smooths the price data and the bands represent volatility. We can see volatility contract when the bands narrow and volatility expand when the bands widen.

FIGURE 1: RESEARCH IN MOTION WITH BOLLINGER BANDS. Here, the middle band is the 20-day moving average, the top one is two standard deviations above the middle, and the lowest one is two standard deviations below. The moving average evens out the price data and the bands represent volatility.
Graphic provided by: MetaStock.
 
The top indicator shows the Bollinger Band differential, which is the percentage difference between the upper and lower band. This indicator is trading near its 2006 lows (green box), and this shows that the Bollinger Bands have narrowed over the last few weeks. This is the fifth time the Bollinger Band differential have moved below 10% (blue lines), and traders should be on guard for a move in the stock.

FIGURE 2: RESEARCH IN MOTION. Here, we can see a rising flag in the works, a potentially bearish pattern.
Graphic provided by: MetaStock.
 
The Bollinger Bands do not provide directional clues and we must use other tools to predict the direction of the next move. Figure 2 shows a rising flag in the works and this is a potentially bearish pattern. However, the flag is still rising and the stock gapped up two days ago. The gap is bullish and the rising flag reflects a short uptrend. As such, I would stay bullish on the stock and expect a challenge to the early July high. The trend is in force until proven otherwise. A break below the lower flag trendline and early August low (63) would confirm the flag as bearish and project a decline into the upper 50s.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Date: 08/09/06Rank: 4Comment: 
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