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[Camisa Roxa]

I received a question from a regular reader about the difference between Bollinger
Bands and Acceleration Bands. I covered this topic last October, but I keep learning
more interesting facts in watching the interplay between Bollinger Bands and
Acceleration Bands.

There was a time when I would only say "use Bollinger Bands on trading range markets
and use Acceleration Bands on trending markets." The fact that Bollinger Bands race
to catch up more quickly when a stock breaks outside the bands led to my creation of
Acceleration Bands, as I wanted a band that could act as a trailing stop for a big
trend on the upside or the downside. But now I actually like to watch both of these
bands on the same chart.

Take the weekly chart of the Nasdaq Composite, created with 20-day Bollinger Bands
(with plus and minus two standard deviations, plotted on each side of the simple
20-day average). These are the pink bands in the Big Trends Charts settings. Then I
also plot the 20-day Acceleration Band, shown in red on the same chart. (The actual
formula for Acceleration Bands is given on page 92 of my book, Big Trends in
Trading). Note how the break to the downside that started last May led to the lower
Bollinger Band breaking below the lower Acceleration Band. This signaled a market
that was trending to the downside. In contrast, when the Bollinger Bands are trading
inside the Acceleration Bands, you have a more clear trading range market. Such is
the case currently, and you can see how selling the upper Bollinger Band in late
November and buying the lower Bollinger Band a couple of weeks ago proved timely
strategies within a range.

Nasdaq Composite Weekly with Bollinger Bands and Acceleration Bands

Bollinger Bands are also quicker to turn, which can signal a change in trend. Notice
how the lower Bollinger Band turned up the week of October 11, right as the market
bottomed. This was the first turn up since late March 2002, which helped keep you on
the right side of the trend and then know when the odds were no longer favoring
shorts last October. In comparison, Acceleration Bands are slower to react. This
might seem like a detriment, but in past trending markets this has served to keep me
on big moves while also knowing to exit if the stock had a close back within its
Acceleration Band. Generally the lower band will act as support, as it did in
October, while the upper band should act as resistance. But it is the breakouts
outside of these bands that lead to the best trends. Now that I use both Bollinger
and Acceleration Bands together, I find that I can even more clearly define whether
the market is trending or stuck in a range. Currently this suggests that you should
keep trading the range until the Bollinger Bands make a cross outside the
Acceleration Bands.

KEY SUPPORT AND RESISTANCE LEVELS

SUPPORT RESISTANCE

Nasdaq Composite 1365 1400

S&P 500 850 880

Dow Industrials 8105 8300