Updating the SP 500 and Sigma Bands for March

Mar 1, 2012: 7:29 PM CST

I’ve posted previously about how price has a tendency to ride between “Sigma Bands” or Standard Deviation Bands for extended periods of time, and that’s what’s happening at this moment in the S&P 500.

Let’s take a quick look at the current S&P 500 Sigma Band chart and note the developments so far – and levels to watch for a reversal/break from this pattern.

To get background information on this chart, visit my prior post “A Lesson on Silver, Stability, and Sigma Bands.”

The main idea is that the bands you see above are Standard Deviation Bands that go beyond the standard two Standard Deviations you see on classic Bollinger Band charts.

The Sigma Bands extend from 1 to 4 Standard Deviations higher and lower than the 20 period simple moving average.

What we’re seeing now is a sort of “pattern” or “situation repeat” from the previous period where the S&P 500 consistently trended between the first and second Standard Deviation Bands in a consistent/creeper uptrend.

For reference, in late 2010, Gold also “rode the first and second sigma bands higher.”

The main take-away is that these bands can contain persistent trends and give intraday/short-term traders an updating reference level for trading strategies and set-ups.

The other lesson is that price can continue repeating this pattern for longer than  you assume.

This was the case as highlighted earlier during a similar situation from 2010 to 2010 (during QE2):

To recreate these charts, you can add multiple Bollinger Band indicators to a single chart and just adjust the settings from the default two Standard Deviations.

The Sigma Band chart displays 1, 2, 3, and 4 Standard Deviations from the default 20 period moving average (used in the calculation of the default Bollinger Band).

For historical reference under similar situations, November 2010 saw an initial burst higher which gave-way to a retracement lower.

February 2011’s lengthy pattern ended with a breakdown move under the 20d average which continued to lower targets.

Keep watching price between these reference bands and be sure to note any sudden departure or deviation from the current similar pattern.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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