Colgate Breaks After Volatility Contraction

12/12/08 11:21:37 AM

by Arthur Hill

After going through a Bollinger band contraction, Colgate-Palmolive broke support to signal the start of a leg lower.

Security: CL
Position: Sell

Figure 1 shows Colgate-Palmolive (CL) with Bollinger bands. These volatility bands are set two standard deviations above and below the 20-day simple moving average. They contract when volatility falls and expand when volatility rises. Volatility contractions often preceded volatility expansions, and this can forecast price movements.

FIGURE 1: CL, DAILY. Note the Bollinger bands. These bands are set two standard deviations above and below the 20-day simple moving average.

Graphic provided by: TeleChart2007.

The first sign of a volatility expansion is a move above the upper band or below the lower band. On the chart, CL declined sharply over the last three days and moved below the lower band with the last intraday low. This decline was also sharp enough to start the bands expanding again and it looks like a volatility expansion is under way.

Figure 2 shows CL with traditional pattern and momentum analysis to confirm the downside bias. First, the stock formed a triangle over the last few weeks. With the decline over the last three days, CL broke triangle support, signaling a move lower.

FIGURE 2: CL, DAILY. The stock formed a triangle over a period of a few weeks.

Graphic provided by: TeleChart2007.

The bottom indicator window shows the moving average convergence/divergence (MACD) moving below its signal line and into negative territory. The MACD hovered in positive territory throughout November, and this move into negative territory is bearish. It confirms the triangle break and also points to lower prices. An MACD move back into positive territory would call for a reevaluation of these bearish signals.

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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BOLLINGER BANDS

Colgate Breaks After Volatility Contraction

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