by Alex Martin

In this month's newsletter we will be screening with bands and channels.

Screening with the Bollinger Band

Overview:

Bollinger Bands are two standard deviations above and below a moving average, which is usually 20 days. Using two standard deviations ensures that 95% of the price data will fall between the two outside bands.

John Bollinger has written that, "Trading bands are one of the most powerful concepts available to the technically based investor, but they do not, as is commonly believed, give absolute buy and sell signals based on price touching the bands. What they do answer is the perennial question of whether prices are high or low on a relative basis." He goes on to say, "It is the action of prices near the edges of the envelope that we are particularly interested in."

According to Bollinger, one of the biggest mistakes in technical analysis is the multiple counting of the same information. For example, using different indicators all derived from the same series of closing prices to confirm one another.

The indicators he recommends to complement Bollinger Bands are:

Screening Conditions:

When using the Bollinger Band in a technical screen, combining both signals is an effective way to find breakouts.

Signal 1: Price crosses center line   Signal 2: Price penetrates outer band.

I found this stock using the following screen.

Technical conditions:

Fundamental conditions:

Results:

The results have returned stocks that, at the very least have a short-term up-trend.

Symbol	Signal	Quick Comment
AAI:		Over the last six months this stock appears to have a sideways moving pattern. However, this would be an excellent stock for swing traders since it appears to be cyclical. A bullish ascending triangle (with a small breakout) has formed as well which suggests that the demand remains stonger than the supply. Things to look for when analyzing this stock are: What do the company fundamentals tell you? Complementary indicators as well as a one to five year historical view.
AAI 6 month Chart	(click on graphic to enlarge)
Symbol	Signal	Quick Comment
ACTU:		Although the signal can be seen here, the last three months clearly show a sideways trending stock.
ACTU 6 month Chart	(click on graphic to enlarge)
Symbol	Signal	Quick Comment
AEOS:		This stock has entered a plateau (or consolidation) and is in a sideways pattern.
AEOS 6 month Chart	(click on graphic to enlarge)
Symbol	Signal	Quick Comment
AKAM:		In the last three months this stock has generally been in a downtrend.
AKAM 6 month chart	(click on graphic to enlarge)

We can see from our first four stocks, that there is a relationship with the distances of the two signals.

AAI, the signals are 10 and 1, ACTU, the signals are 4 and 1, AEOS, the signals are 2 and 1, AKAM, the signals are 5 and 1.

Better results are typically found when looking at signals that are over five days apart. This removes some of the sideways trending patterns. It is also important to note that complementary indicators would be a useful addition to this screen (since 139 results were returned). As stated, try combining one of the following with this screen to help reduce your results list and increase the relevance of the stocks returned..