Don't Ignore This Chart

Band Width Contracts as Dow Transports Stall

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The Dow Transports have been flat for four weeks as the Average forms small weekly candlesticks in the 5000-5100 area. A visual assessment indicates that these are the smallest candlesticks of the year. Bollinger Band Width (10,2) contracts as the Average stalls. This volatility contraction could give way to a volatility expansion in 2011. Watch the direction of the price break for the first clue.

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Arthur Hill
About the author: , CMT, is a Senior Technical Analyst at StockCharts.com. He has written articles for numerous financial publications including Barrons and Stocks & Commodities magazine. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed technician. In addition to his CMT designation, Arthur holds an MBA from the Cass Business School at City University in London. Learn More
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The tight 4 weeks pattern (as few as 3 weeks is acceptable) is one often identified by many professional traders as a launch pad for a rally. The pattern is bullish when it occurs after a base breakout, which appears to be the case with the Transports as shown in your chart. I would wager that the likelihood of a rally in transports in the coming weeks (based on this pattern) appears to be better than even odds. Of course, the pattern does not always pan out. Refer to William O'Neil's recent books for more on this subject called "the 3 weeks tight" pattern.
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