Analysing Stock Charts Using Bollinger Bands

In the same chart, note that the beginning of the Bollinger band expansion coincided with a slight touch on the upper band, which can also be observed during the beginning of the second expansion. Brief moves to either Bollinger bands are called tags. Usually, they would indicate a strengthening momentum in whatever price trend they are found in.  In the case of the Hua Yang stock price, they happen to be an indication of a continuation of the uptrend for both months they are observed in.

W-bottoms and M-tops usually can be found in a consolidated price pattern, i.e. during a Bollinger band squeeze. W-bottoms occur in an uptrend, while M-tops in a downtrend, both useful in determining a drastic price change, at least most of the time. A W-bottom, which is employed to predict a bullish move in the price, is characterized by a price low which usually touches the lower band, a pull back to the middle band, and a subsequent price low which does not touch the lower band, whereas an M-top, used to predict a bearish price move, can be identified by a price high that touches the upper band, a pull back to the middle band, and a subsequent price high which does not touch the upper band.

Above is a stock chart presenting the price movements of IGB Corporation Berhad, a Malaysian company as well. In late June, there is a price high pressing against the upper Bollinger band, then a price withdrawal to the middle band in early July, and a second price high that fails to reach the upper band: all the conditions to form an M-top. A bearish price move is confirmed by the price breaking through the support price level of around 2.70 and a bearish tag signalling the strengthening momentum of an upcoming downtrend.

The third condition of an M-top, that the second price high does not touch the upper Bollinger band, points to the fact that the momentum of the uptrend it is found in is weakening. In this case, the faltering progression of price highs would suggest that the price is now tending toward a downtrend.

You can find two examples of a W-bottom in this next stock chart of DIGI, a Malaysian telecommunications company. A price low occurred in the middle of March, touching the lower Bollinger band, followed by a withdrawal to the middle band and a subsequent price low in early April, which fails to touch the lower band. A resistance break occurred in the beginning of May, though only briefly as the price faltered back to the middle band. In mid-May, you can see a price low hovering around the lower band, then a pull back to the middle band in the beginning of June, and finally a small dip from the peak only a few days away, the price low observed to be nowhere near the lower band: all the conditions satisfied for a second W-bottom. The bullish signal is only then confirmed by an immediate resistance break and a bullish tag found in mid-June.

The third condition of a W-bottom, that the second price low does not touch the lower Bollinger band, alludes to a weakening in the downtrend at the time; in the case of the second W-top in the stock chart, which happens to be a more apparent example on the bullishness of the W-top, the downtrend it is observed in weakens as the stock price tends toward an imminent upsurge, as can be seen from the growing progression of price lows.