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BOLLINGER BANDS


LSI Breaks Flag Resistance

04/10/08 09:01:17 AM
by Arthur Hill

After a Bollinger Band contraction, LSI broke rectangle resistance, signaling a continuation of the January surge.

Security:   LSI
Position:   Buy

Figure 1 shows LSI Corp. (LSI) with Bollinger Bands. The upper and lower bands are set two standard deviations from the 20-day simple moving average. The bands narrow when volatility decreases and expand when volatility increases. Normally, volatility decreases during a trading range and increases on a breakout.

FIGURE 1: LSI, DAILY. Here, the upper and lower bands of the Bollinger Bands are set two standard deviations from the 20-day simple moving average.
Graphic provided by: TeleChart2007.
 
The blue box shows a period of decreased volatility. Note that this was preceded by a period of increased volatility. Bollinger Bands do not provide any directional clues and only help to identify periods of lower volatility that can foreshadow a significant move.

Figure 2 focuses on the breakout. The Bollinger Bands told us that volatility was decreasing and to prepare for a potential move. The stock surged in January and then consolidated in February and March. The pattern looks like a large flag or rectangle. The recent break above the February–March highs is bullish and signals a continuation of the prior advance.

FIGURE 2: LSI, DAILY. In this chart, the breakout can be seen. The bands indicate that volatility was decreasing and that we should prepare for a potential move.
Graphic provided by: TeleChart2007.
 
Momentum and relative strength confirm the breakout. The red indicator compares LSI to the Standard & Poor's 500 exchange traded fund (ETF)(SPY) for a measure of relative performance. There was also a surge in January and then a consolidation. The indicator broke out with the stock, and this shows relative strength. The bottom indicator shows the moving average convergence/divergence (MACD), which measures momentum. The indicator hovered around the zero line as the stock consolidated and turned up over the last few days as the stock broke resistance. Momentum is also on the way up, and this is bullish.



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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Website: www.tdtrader.com
E-mail address: arthurh@tdtrader.com

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