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BOLLINGER BANDS


A Squeeze Play For Safeway

10/12/07 09:14:28 AM
by Arthur Hill

Safeway moved into a tight trading range, and contracting Bollinger Bands point to a breakout sooner rather than later.

Security:   SWY
Position:   N/A

Figure 1 shows Safeway (SWY) with the Bollinger Bands. The centerline is a 15-period moving average and the bands are 1.5 standard deviations from this moving average. The classic Bollinger Band settings are for a 20-day moving average and two standard deviations. I elected to tighten these settings because Safeway has relatively low volatility and I wanted to make the indicator more sensitive.

FIGURE 1: SAFEWAY, DAILY. Here's SFY with Bollinger Bands. The classic band settings are for a 20-day moving average and two standard deviations.
Graphic provided by: telechart2007.
 
SWY surged in the first part of September and then consolidated the last few weeks. The Bollinger Bands expanded during this surge as volatility increased and then contracted as the stock consolidated. Safeway has traded within a two-point range the last three weeks and the contracting Bollinger Bands confirm that this is a pretty tight range. In fact, the Bollinger Bands are the narrowest in months and this could foreshadow a consolidation break.

For directional clues, I am looking at some key moving averages and the price pattern since early September (Figure 2). The surge above 33 broke both the 200-day and 50-day moving averages. This is quite positive and these moving averages now turned into support. The stock has stalled around 33 and both moving averages are flattening around 33.

FIGURE 2: SAFEWAY, DAILY. The surge above 33 broke both the 200-day and 50-day moving averages.
Graphic provided by: TeleChart 2007.
 
The price pattern looks like a surge and pennant. This is a bullish setup and a break above 34 would signal a continuation of the September surge. I would then expect a similar move (three to four points) and this would target further strength toward 36-37. The pennant lows mark support and a move below these lows would be 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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Date: 04/09/08Rank: 5Comment: 
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