Fascinating Chart as SPX Stays Tight Within Sigma Bands

Oct 16, 2010: 12:29 PM CST

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

Follow Corey on Twitter:  http://twitter.com/afraidtotrade


7 Responses to “Fascinating Chart as SPX Stays Tight Within Sigma Bands”

  1. CumbucoTrader Says:

    New blog post on banks, foreclosures, Dollar, Euro:

    Reasons to Be Cautious


  2. Festival of Links 10/17/10: @Fibline FTW! StockTwits U Says:

    […] post from @AfraidtoTrade on Sigma Bands.  If you utilize Bollinger Bands then this is must […]

  3. Bob Campbell Says:

    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.

  4. Gold Also Rides Between the Two Sigma Bands | Afraid to Trade.com Blog Says:

    […] Also Rides Between the Two Sigma Bands Oct 18, 2010: 12:59 PM CST This weekend, I showed how the S&P 500 has been riding between the first and second Standard Deviation (also called “Sigma”) […]

  5. shemp_4 Says:

    the runup from beginning of march thru apr 26 presented a similar chart

  6. SP500 Continues to Ride Sigma Bands Higher | Afraid to Trade.com Blog Says:

    […] Continues to Ride Sigma Bands Higher Feb 25, 2011: 8:11 PM CST Earlier, I posted that the S&P 500 was riding the first and second Sigma (standard deviation) bands all the way up, and that concept has continued during the recent rally – until this […]

  7. SP500 Again Riding the Sigma Bands in August | Afraid to Trade.com Blog Says:

    […] “Chart of SP500 Trading Between Two Sigma Bands“  October 2010 […]