I left you last week with John Bollinger and his famous Bollinger Bands. Not surprisingly, his bands have bandwidth; but, unlike the bandwidth that you might receive on your iPod or Zune, this bandwidth can help you to determine when you might want to purchase or liquidate partial or full holdings.

You'll need to head to your Yahoo! portfolio, pick a stock in that portfolio and open that stock's chart. Use the beta version so that you can add and remove different technical tools from the dropdown menu (see previous three articles on how to manipulate the Yahoo! portfolio and about moving averages if you're just now dropping by).

The Bollinger site does a fine job with their brief description about Bollinger Bands, so I'll paraphrase it here: Basically, Bollinger Bands consist of a set of three curves drawn in relation to your stock's price. The middle band is a measure of an intermediate-term trend, usually a Simple Moving Average (SMA) that serves as the base for the upper and lower bands. The interval between the upper and lower bands and the middle band is determined by volatility, typically the standard deviation of the same data that were used for the average.

Ok - I'm going to stop there, because the description becomes a bit technical. From here on out, all anyone needs to remember is this:

• The width between the bands, or the Bandwidth, is the most important display for this tool, as the width displays the measure of volatility in the market.
• A narrow width represents low volatility. When the bands move further apart, this wider distance represents higher volatility.
• So, when bands begin to move closer together, traders can read this movement as an early indication that the volatility is about to increase sharply after this narrowing. This is known as "The Squeeze."
• Additionally, the closer the stock prices move to the upper band, the more overbought the market.
• The closer the prices move to the lower band, the more oversold the market, according to technical analysts.

The parameters, time periods, and two standard deviations contained within the Bollinger Bands may be adjusted to suit your purposes, just like you adjusted the day lengths for the moving averages in previous lessons. But, the problem begins when you open your Yahoo! beta chart and discover that your Bollinger Bands sport only two lines instead of three. The bottom, not the middle line, represents the SMA. What to do?

Remove any technical tools that you've drawn onto your chart to start fresh (just click on the checked tool from the dropdown menu under "Technical Indicators" and when that tool's box pops up, click on "remove"). Now, go to the Bollinger Band tool and input "50" instead of the default "20" periods in the top box, and leave the deviation at "2."

The deviation is a mathematical formula that measures volatility, and it shows how that stock's price can be spread around its true value. Since you're using two bands, use 2 deviations. This deviation will not change for this lesson.

Click "draw," and you'll see two lines that will surround your stock's price line, but that may allow the stock price to "punch through" either the upper or lower line. Look closely at that chart to see how the Bandwidth changes. Now, add volume to the chart to see how the volume corresponds with those width changes (volume is located under the "Technical Indicators"). Play around with the time frames at the bottom of the chart to see how that bandwidth changes over time.

What you may see is an increase of volume during and/or shortly after a narrowing of that bandwidth. Increased volume can increase volatility. You may also see a drop or a rise in that stock price as well, a movement that might seem more volatile than most other price movements during that three month time frame.

Now, I want you to add a 50-day SMA to the chart by clicking on the SMA at the top of the list in your "Technical Indicators." A green line should show up between those two Bollinger Band lines. If you remember from previous weeks, that SMA will either support or resist a price line. Look at the area where the Bollinger Bands narrow on your chart. Where is that SMA in the scheme of things on your chart in that area?

In many cases, when Bollinger Bands narrow and the price line drops, you'll see that the SMA will be located above that price line in resistance mode. In other cases, when the Bollinger Bands narrow and the price rises, the SMA will be located below the stock's price line in support.

But, every case is different, and you might see some aberrations in your chart. If you're interested in these technical tools and how they can help you to determine entry and exit points, then stick around and play with those charts. Move the time frames around at the bottom of that chart, change the days for the moving averages and the Bollinger Bands, and add an Exponential Moving Average (EPA) to see how all these indicators lag somewhat behind the stock's price line.

Since those moving averages lines tend to lag, the Bollinger Bands add to many analysts' confidence as they try to determine how a stock might move in the future. While none of these indicators serve as a crystal ball, you can often use them to your advantage, especially when you see that the volume is rising on that volatility. High volume is a sure indicator that buyers and sellers are in the market - whether they're buying or selling is the question!

Until Then,
Linda Goin