Fascinating Chart as SPX Stays Tight Within Sigma Bands
During a bit of weekend analysis, I found this particular indicator/chart really interesting, as the S&P 500 has literally been contained within the boundaries of the 1st and 2nd Standard Deviation (‘sigma’) bands for a good portion of the ride up from September.
Let’s see what Sigma Bands are – basically a more revealing Bollinger Band indicator – and why they’ve been critically important recently.
You can click for a bigger image, though this size does the job.
If you think this is a chart gone crazy, let’s take it one step at a time.
This is a derivative indicator I crated in TradeStation, which takes the standard Bollinger Band formula and shows FOUR standard deviations above and beneath the mean, as opposed to the two SDs that Bollingers show.
As a review, Bollinger Bands show the 20 day simple moving average as the ‘mean’ and then the indicator displays the 2 standard deviations as lines above and beneath the mean.
In my indicator, I’ve plotted the ‘mean’ (20 day SMA) blue (in the middle) and then colored the standard deviations ABOVE the mean green and those beneath the mean as red.
The wiggly lines are just a reflection of the change in volatility – and thus standard deviation – over time.
With that out of the way, let’s ignore everything on the chart except for the three highlighted periods I have shown.
Namely, let’s focus on the two recent highlighted periods from September to present.
What’s going on is that Price is staying bound – almost to the index point – between the first and second Standard Deviations above the 20 day mean/average.
That’s pretty cool – and not that common.
The general theory around Bollinger Bands is that if price pokes outside the second standard deviation, odds are that it will return back to the average before long.
What’s happening now is that price appears to be playing ping-pong between the 1st and 2nd ‘Sigma’ (standard deviation) lines as shown.
While these lines change every day, and you can keep track of this yourself, the current boundaries are 1,167 and 1,182. That was almost exactly the range of Friday, Thursday, and most days previously – as the high of the session hit the upper line and the low of the session hit the lower line.
I’ll leave it up to you as to how to incorporate this into your own trading or insights – but as long as this phenomena continues, it would probably be helpful to keep up with these numbers on a daily basis.
Corey Rosenbloom, CMT
Afraid to Trade.com
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I find it interesting that price tends to find the Sigma Bands and travel between them for awhile until it latches on to another set of Sigma Bands.
the runup from beginning of march thru apr 26 presented a similar chart