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The March jobs report was released Friday morning, showing that the United States added 215,000 jobs, which is up from economists' projection of 203,000 jobs.
These numbers further add to the increasing level of confidence consumers have about the economy and investors have about the markets…
And this means that we could be looking at some great trading opportunities with triple-digit profit potential this week.
On Thursday, we talked about Bollinger Bands and how you can use them to play this rising investor confidence.
And as you'll recall, I mentioned that there are two key technical patterns to follow when using this tool.
Today, I'm going to show you exactly what they are and how you can use them to double your money before the next opening bell.
Let's get started.
The Best Trading Pattern Duo to Use with Bollinger Bands
Last week, we talked about the basics of Bollinger Bands. Today, I want to spend time showing you two technical trading patterns to use in tandem – one at the top and the other at the bottom of the Bollinger Bands.
The idea is to capture a trade opportunity that is a reversal-type trade. What I mean by this is that the trade will look to capture a price move off either of the outer bands to either the midpoint of the Bollinger Bands, which is the simple moving average (SMA) that the bands are plotted around, or a move off one of the bands to the other (or opposite) band.
Now there are multiple setups you can use with Bollinger Bands, but what we're going to look at today are ones that I favor. For more on how to utilize this indicator, I consider John Bollinger's first book, "Bollinger on Bollinger Bands," an essential read.
Before we get into these two patterns, let's recap the three patterns (or movements) we looked at on Wednesday…
In periods of low volatility, the bands will tighten and get closer and closer together to the point where they run almost parallel to the stock price and there isn't a wide chasm between the two. Also, the stock at this time of low volatility tends to trade in a sideways trending nature.
As volatility starts increasing, the price will start breaking out of this sideways trend. When this starts happening, the stock will start to break out to the upside and touch outside (or at times exceed) the upper band. In the event that the move is to the downside, the stock will touch (or at times exceed) the bottom band.
Then, the stock will continue to move in that direction if the move proves to be valid, causing more traders and investors to buy or sell.
Walking the Bands
The stock will sometimes show that the commitment of traders is greater than normal in that the slope of the move will be steeper. When this happens, the stock will trade along the upper or lower band in that steep slope in a move that's known as "walking the bands."
Now let's talk about my two favorite patterns to use with Bollinger Bands.
"M" Tops and "W" Bottoms
There are times when the stock price exceeds the outer bands and the price will snap back within the bands. The outer bands can get stretched, but they won't break, forming "M" tops and "W" bottoms.
When these Ms at the top of the bands and Ws at the bottom of the bands appear, they give an indication of the strength of the trend.
Legendary chartered market technician Arthur Merrill, who Bollinger assisted for many years, identified 16 M and W formations. Bollinger has incorporated these patterns with his Bollinger Bands to identify these formations, which indicate that a future price move should follow.
A Closer Look at the W Bottom
The ideal W bottom setup is where:
- A low in price occurs, sometimes below the lower band, but not always. Then there's…
- A bounce in price to the middle band (SMA). Next…
- A new low in price should happen, but the price should hold above the lower band. Now a new low in price may not happen, which would still be considered a valid move for the pattern. Keep in mind, though, it would be more ideal if it did. Finally…
- Confirmation of this pattern is achieved when the price breaks above the most recent pivot high or resistance area.
A Closer Look at the M Top
The ideal M top setup is where:
- A high in price occurs, sometimes above the upper band, but not always. Then there's…
- A drop in price to the middle band (SMA). Next…
- A new high in price should happen, but the price should hold below the upper band. A new high in price may not happen, which would still be considered a valid move for the pattern. Keep in mind, though, it would be more ideal if it did. Finally…
- Confirmation of this pattern is achieved when the price breaks below the most recent pivot low or support area.
The more aggressive approach to trading this pattern is to try and trade off the second retrace – either the second high or low. The more conservative approach is to trade after the breakout of the most recent high or low.
You might find that it's harder to pick tops and bottoms than if you just try taking a piece out of the middle part of the move when trading.
As I mentioned above, there are other trading setups you can find and use. I encourage you to read Bollinger's books to look at more setups.
As for me, my website has a tutorial that shows a few of these. Here's a glimpse:
"Walk These Bands" to 100% Gains This Spring: Stocks have rebounded from their mid-February lows, reflecting higher confidence levels in the markets. You can use that increased investor confidence to your advantage. This technical indicator measures whether a stock's price is relatively high or low – exactly the kind of data you need to capture 100% gains…
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.