DAILY BOLLINGER BANDS SHOW SHORT-TERM STOCK TREND IMPROVING AND A POSSIBLE RETEST OF NOVEMBER HIGH -- WEEKLY AND MONTHLY BANDS ALSO SHOW SUPPORT -- BOLLINGER BAND WIDTH, HOWEVER, SHOWS THAT VOLATILITY REMAINS ELEVATED

SHORT-TERM TREND IS IMPROVING ... There are lots of ways to determine the trend of the stock market. The placement of moving average lines is one of them. Bollinger bands (invented by John Bollinger) are another. Chart 1 applies both techniques to a daily chart of the S&P 500. The chart shows the SPX bouncing off previous support at its late October low which is positive short-term development. And it's now moving up to test its 200- and 50- day moving averages (red and blue lines). The 14-day RSI line (upper box) and daily MACD lines (lower box) are also improving. The two solid green lines overlaid on Chart 1 are Bollinger bands. The green middle dashed line is the 20-day moving average, which is used to measure short-term trends. The two outer Bollinger bands are plotted two standard deviations above and below that middle line. Those two outer bands can act as support and resistance levels. A price drop below the 20-day line often signals short-term weakness, as it did at the start of October. The chart, however, shows the last two recent price bottoms finding support at the lower band (green circles). The SPX has now moved back over the middle 20-day line which reflects short-term strength. And it also shows the upper band coinciding closely with its early November peak at 2815, which represents an important resistance level. Weekly Bollinger bands are also providing support.

Chart 1

WEEKLY BANDS PROVIDE SUPPORT ... Chart 2 applies Bollinger bands to a weekly chart of the S&P 500. Except in this case the middle dashed line is a 20-week moving average of the SPX. One of the nice things about using the bands is that you don't have to make moving average adjustments when shifting from daily to weekly charts (or even to monthly and hourly bars). The bands automatically adjust to any 20-periods. Weekly bands are interpreted the same way as daily bands. The October drop below the dashed 20-week average resulted in a test of the lower weekly band. And the SPX found support there (as it did during the downside correction earlier in the year). In order to turn its trend higher again, however, the SPX needs to rise above its 20-week average which sits very close to the 2815 level formed in early November. Which makes that an even more important resistance level. A decisive close above both chart barriers would signal higher prices. Monthly bands are also helping.

Chart 2

MONTHLY BANDS ALSO SHOW SUPPORT... Chart 3 shows Bollinger bands applied to a monthly chart of the S&P 500. The middle line in this case is a 20-month moving average. And that's an important line. Any serious close below that middle line usually signals a much deeper correction (and can sometimes signal the start of a bear market). The chart shows prices falling below the dashed 20-month average near the start of 2016 before finding support near its lower band. It did the same during the 2011 correction. [The breaking of the middle line also signaled the start of the last two bear markets in 2000 and 2007]. The good news on Chart 3 is that the SPX is bouncing off that long-term support line. That prevented a more serious downturn and helped stabilize the market. Another advantage of Bollinger bands is that they offer a potential downside target if the 20-month average is broken. The lower band currently sits at 2335 which is approximately 15% below its current price.

Chart 3

BOLLINGER BAND WIDTH REMAINS ELEVATED ... There's more to Bollinger bands than just looking at the three lines. The green line on top of Chart 4 measures Bollinger band width (which can be found under the indicator listings for any chart). As its name implies, that line measures the width (or distance) between the two outer Bollinger bands. Why do that? Because the width between the two bands is one way to measure market volatility. As a rule, the BB width indicator tends to decline as prices rise. Their width tends to rise during periods of higher market volatility and lower stock prices. Chart 4 shows that happening at the start of the year when band width suddenly spiked higher. Downturns in that indicator are usually associated with market bottoms. Which brings us to where we are now. The band width in the upper box spiked higher during October as stock prices fell. Its recent peak also suggests that the worst may be over for the time being. But there's a potential problem. The November trough in the width indicator still remains elevated relative to where it's been since the first half of the year. That suggests that the market isn't giving an all clear signal. It's telling us that the short-term market trend is improving. But it may also be warning that more volatility could lie ahead.

Chart 4

WEEKLY BAND WIDTH ALSO SUGGESTS RISING VOLATILITY... Chart 5 overlays weekly Bollinger bands on a weekly bar chart of the S&P 500 over the last three years. It shows the strong tendency for prices to trade within the two outer bands. It also shows the lower band providing support during the 2015-2016 market correction. My main interest here, however, is with the line in the upper box which measures the width between the two outer Bollinger bands. The upper line shows band width (and market volatility) spiking higher in the middle of 2015 which marked the start of that second half correction. The peak in the width line in early 2016 signaled a market bottom. The line spiked higher again near the end of 2017 which warned of higher volatility as we entered 2018. There again, a peak in the upper line during the first quarter of this year signaled that a bottom was near. The recent correction in stocks didn't push the weekly line much higher. But it isn't dropping either. It's rising to the highest level in six months. It's also worth noting that the first half downturn in the BB width line didn't fall as far as in past years. That suggests that market volatility remains elevated. The rising trendline in the top right box also shows a pattern of rising bottoms over the past year. That may be another warning that the nine-year bull market in stocks could be entering a period of rising volatility.

This week's stock rebound increases the chances for a much-anticipated yearend rally. But that will depend on its ability to rise back above moving average lines and its early November high. If that happens, the bigger test for stocks will be whether or not they can mount a serious challenge of their October highs. Stocks got a big lift this week from a more dovish sounding Fed chief. But a lot is also riding on trade talks this weekend between the U.S. and China. Either way, Monday should be a very interesting trading day.

Chart 5