Bollinger Bands Tighten On UPS

04/17/07 09:00:26 AM

by Arthur Hill

Trading has gotten quiet in United Parcel Service, and such periods often precede a sizable directional move.

Security: UPS
Position: N/A

United Parcel Service (UPS) has underperformed the Dow transports and the overall market over the last four months. The Standard & Poor's 500 moved to a multiyear high this week, and the Dow transports is just a few percentage points off its all-time high. In contrast, UPS peaked in late November and has been trending lower the last four months. The stock is around 12% down from its November high, and relative weakness is a concern. In addition, note that the price relative moved to a multimonth low this week and UPS is out of favor right now. See Figure 1.

FIGURE 1: UPS, DAILY. UPS has underperformed the Dow transports and the overall market in the last four months.

Graphic provided by: Telechart 2007.

Despite showing relative weakness, the stock managed to stabilize over the last six weeks and formed a tight consolidation. The pattern looks like a slightly rising flag, and a break below the April low would signal a continuation lower. The last decline was around 6 points and a similar decline would target weakness to around 65. Consolidation resistance is at 71.65 and a break above this level would be bullish. This resistance area is also confirmed by the 50-day moving average.

FIGURE 2: UPS, DAILY. The narrowing of the bands shows decreasing volatility.

Graphic provided by: Telechart 2007.

The Bollinger Bands hint at some action in the coming days or weeks. Bollinger Bands are based on volatility and the narrowing of the bands shows decreasing volatility (Figure 2). This low volatility acts as the calm before the storm, and the direction of the band break will dictate the next signal. A move above the upper band would be bullish and a move below the lower band would be bearish. These bands correspond with consolidation support and resistance as well.

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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