Mid-March SP500 and Dow Jones Sigma Band Update

Mar 18, 2013: 1:59 PM CST

I’ve often documented periods where the SP500 (and related indexes) trended steadily between the first and second “sigma band,” and we’re in another period of similar behavior.

Let’s update the current S&P 500 and Dow Jones “Sigma Band” (standard deviation) chart and note what levels to watch for clues.

The chart above shows the S&P 500 Index and extra “Bollinger Bands,” or Standard Deviation Bands away from the 20 period moving average.

While the classic Bollinger Band indicator shows two standard deviations above and beneath the average, a “Sigma Band” chart expands those to show 1 to 4 similar bands for added levels of structure.

As is the case with Bollinger Bands, a compression or “Squeeze” tends to occur before a range breakout impulse move and I highlighted three recent “Sigma Squeeze” periods (where the bands compress around a low-volatility period in price).

Beyond the “Squeeze and Breakout” concept, we have another lesser-known phenomenon where price rides or trends steadily between two of the Sigma Bands, often the 1 and 2 Standard Deviation (Sigma) lines.

Let’s see what that looks like on a tighter price chart:

I highlighted the region between the first and second standard deviation lines from the 20 day moving average.

These can serve as very short-term reference points for periods of higher than normal trendiness (impulse or creeper trend environments).

Price has a tendency to bounce between these levels, giving short-term and even swing traders opportunities to place trades, play for targets, and perhaps more importantly, manage (trail) stops.

I’ve documented this price behavior in many previous updates including (for reference):

“Triple Indicator Volatility Check”

SP500 Again Rides the Volatility Bands (August 2012)

“Updating the SP500 Sigma Bands for March 2012?

“A Lesson on Silver, Stability, and Sigma Bands”

“SP500 Continues to Ride Sigma Bands Higher” February 2011

“Gold Also Rides Between Two Sigma Bands” October 2010

Chart of SP500 Trading Between Two Sigma Bands“  October 2010

At the moment, the two rapidly expanding Sigma Bands reside at 1,554 (lower) and 1,577 (potential upper target unless we see a close under 1,554).

To recreate these charts, simply edit and display additional bands from your standard Bollinger Band indicator or plot multiple standard deviation values above and beneath a 20 period simple moving average.

Below is the reference chart for the current Dow Jones Index levels:

We can also observe the three “Squeeze and Breakout” periods similar to those in the S&P 500.

Price tends to alternate between periods of range expansion (high volatility and wide bands) and range contraction (low volatility and narrow bands).

With the Dow Jones currently trading at the 14,500 level, it is bouncing up off the 14,440 first Sigma Band and has been steadily riding (trending near) the second Sigma Band residing at 14,677.

The two recent sell-bars have pulled the index down from the upper band yet – despite the opening gap – the index found support and rallied sharply off the first band.

Use these as short-term reference levels with additional levels price and indicator levels you are watching currently.

Corey Rosenbloom, CMT
Afraid to Trade.com

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