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After essentially trading sideways for nearly 3 weeks, the QQQQ’s broke out last week and charged higher by about 5.5%. This week we have seen some give-back to this move, frustrating those who thought they might be able to get a little more out of their long positions. The question for many traders when dealing with quick, explosive moves like last week is, how do I know when the move is likely at or near its end? When might be a good time to take profits on these type of moves?
One method that I have found to be valuable is offered by John Bollinger in his book, “Bollinger on Bollinger Bands”. On page 123 he writes “When a powerful trend is born, volatility expands so much that the lower band will turn down in an uptrend or the upper band will turn up in a downtrend. When that happens, it is an Expansion, and when the Expansion reverses, the odds are very high that the trend is at an end. That doesn’t necessarily mean the entire move is over. Another leg could easily materialize. But it does mean that the current leg is most likely over. The realistic expectation is now for a consolidation or reversal, not the continuation of the trend everybody is hoping for.”
Let’s look at a chart of QQQQ to illustrate what Mr. Bollinger is saying:
As you can see, after the recent tight trading range caused the Bollinger Bands to squeeze together, the QQQQ’s sharply broke upward. The upward move stalled when the lower Bollinger Band began to curl upwards. If you look back to May, you’ll notice a similar result in the opposite direction. A sharp move down occurred after a tight consolidation. The move lasted until the upper Bollinger Band began to curl downwards – at which point it stalled and drifted higher for a little over a week before the next leg down began.
This is just one method traders may use to anticipate when a move may be ending. It is one I have found to be quite effective, and has been a nice addition to my “bag of tricks” since I encountered it. By the way, I highly recommend “Bollinger on Bollinger Bands” for those who haven’t read it.
Best of luck with your trading,
Rob Hanna
Rob@HannaCapital.com
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.
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The Connors Group, Inc. ("Company") is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities or currencies customers should buy or sell for themselves. The analysts and employees or affiliates of Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company's website, or in its publications, are made as of the date stated and are subject to change without notice.
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