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BOLLINGER BANDS


Trading Turns Quiet At Starbucks

09/19/07 08:30:35 AM
by Arthur Hill

Trading in Starbucks has turned quiet the last few weeks, and traders should watch for a break from the current trading range for the next directional clues.

Security:   SBUX
Position:   Hold

Figure 1 shows Starbucks (SBUX) with Bollinger Bands. The middle band is the 20-day simple moving average (SMA) and the outer bands are two standard deviations above/below this moving average. The bands contract as volatility narrows, and this often precedes a breakout or directional move. Note how the bands contracted in April, preceding a sharp decline in May and June.

FIGURE 1: STARBUCKS AND BOLLINGER BANDS. The middle band is the 20-day simple moving average and the outer bands are two standard deviations above/below this moving average.
Graphic provided by: MetaStock.
 
The top indicator shows the Bollinger Band width, which measures the difference between the upper and lower bands. This indicator is trading at its lowest level since April, and this confirms the current volatility contraction.

The Bollinger Bands tell us that something could happen soon, but they do not provide directional clues. For that, we must turn to the actual price action and other indicators. The stock consolidated between 26 and 28.6 for the last eight weeks. The consolidation narrowed even further the last few weeks and volume has been declining since late July. Trading has gotten rather dull and a surge is needed to break the deadlock. A break above 28.6 would be bullish and a break below 26 would be bearish. Look for volume to expand and confirm a break.

FIGURE 2: STARBUCKS AND RSI. The RSI may break out ahead of the stock. Note how the indicator formed a triangle over the last eight weeks.
Graphic provided by: MetaStock.
 
I am also showing the relative strength index (RSI) and this indicator may break out ahead of the stock (Figure 2). Note how RSI formed a triangle over the last eight weeks and the range is narrowing. The indicator is oscillating above/below 50 and I am looking for a breakout for an early signal. Look for a move above 55 to turn momentum bullish and a break below 45 to turn it 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.

Title: Editor
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