Envelopes and Methods of Price Containment
tends to be more reliable as resistance than as support. This is because prices tend
re‐enter the bands. The bands are not merely barriers to price but they also repre-
sent levels of price being overbought and oversold and as such, prices are expected
to eventually revert back to the central value. See Figure 12.2.bullish and bearish sentiment
It is generally considered bullish if:■ (^) The bands are pointing in an upwardly direction
■ (^) Prices are above the bands
It is generally considered bearish if:
■ (^) The bands are pointing in an downwardly direction
■ (^) Prices are below the bands
Price below the central value is a bearish indication, but price below the lower
band is considered much more bearish. Similarly, price above the central value is a
bullish indication, but price above the upper band is considered much more bullish.
gauging Volatility
Volatility in price is usually indicated in the following ways:
■ (^) The bandwidth expanding for both bands that are based on a fixed percentage
of their central value and on those that are based on average true range (ATR)
■ (^) The bands diverging for envelopes that are based on measures of standard
deviation, such as Bollinger Bands
■ (^) Price exceeding the bands
■ (^) Price whipsawing across both the upper and lower bands
Figure 12.2 Bands as Reliable and Unreliable Support and Resistance on the Daily
Chart of Amazon.com Inc.
Courtesy of Stockcharts.com