Saturday, June 04, 2011

Looking for a short-term trade bounce on the SPY using the Bollinger Bands as a guide

Many traders look for complex algorithms to tell them when the market is ready to bounce but in reality, all you need is a Bollinger Band.   We usually like to buy support when we have the whole sector hit support at the same time.   In fact, these have been our most profitable trades over the course of our trading career.   However, in some situations, like the one we’re in now, sectors are below support and we cannot rely on that strategy for assessing support buys.   When this occurs we look to Bollinger Bands on SPY for quick trades into the blood.

We closed Friday under the Bollinger Band, the first time since March 16.   As you can see from the last time it occurred it offered a nice opportunity long for traders.

Bollinger Bands are great general tools for ETFs

Let’s zoom out and look for other instances SPY has closed below the Bollinger Band.  Time and time again this simple tool has given great general reference points for bounces.

Ideally we sell off into next support, which is at 129.5 zone, and then enjoy a dead cat bounce.  As you know we believe this is a range-bound market meaning we also do not expect a straight trend down.   However, the emphasis lately seems to have shifted from “buy the dip” to “sell the rip”.

Our range now is between 131.4 resistance (which was the old support gap fill) and 129.5 support.

Please view everything we write in the context of our time-frame as short-term traders.

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