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BOLLINGER BANDS


A Bollinger Breakout For Goodrich

09/27/06 08:22:47 AM
by Arthur Hill

Goodrich did not partake in the summer rally, but looked poised to make up for lost time with a nice breakout.

Security:   GR
Position:   Accumulate

Goodrich (GR) declined in May–June and then embarked on a consolidation that lasted until late September. In fact, it could even be argued that the stock was still in a consolidation with resistance near 42 and support near 37.3. However, the surge over the last few days could signal the end of the consolidation and higher prices could be on the way.

Bollinger Bands can be used to identify consolidation periods because they narrow as volatility contracts. Volatility contracts during a trading range and we can therefore look for narrowing Bollinger Bands to identify a consolidation. As Figure 1 shows, the width of Bollinger Bands narrowed over the last few weeks and the stock broke above the upper band with a surge over the last four days. This marks the end of the consolidation phase, and the surge opens the door to higher prices over the next few weeks.

FIGURE 1: GOODRICH. Bollinger Bands can be used to identify consolidation periods because they narrow as volatility contracts.
Graphic provided by: TC2000.com.
Graphic provided by: TeleChart 2007.
 
The relative strength index (RSI) also broke resistance, and this affirms the breakout. Momentum can also move into a consolidation phase, and the 30-period RSI traded flags from early July until mid-September. The indicator met resistance around 50 in July and August. The RSI broke this resistance area in September, and it became clear that momentum could not be classified as bullish.

Where do we go from here? As a consolidation breakout, I would expect GR to move back to its May high around 46. This is the upside target and I would set key support at the mid-September low. A break below 38 would negate the breakout and turn this chart bearish.



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: 09/27/06Rank: 4Comment: 
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