Similarly, prices can “walk the band” with numerous touches during a strong uptrend. It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend. Momentum oscillators work much the same way. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. As Bollinger puts it, moves that touch or exceed the bands are not signals, but rather “tags”. Moves above or below the bands are not signals per se. This evolving top formed a small head-and-shoulders pattern. Notice that this M-top is more complex because there are lower reaction highs on either side of the peak (blue arrow). The stock broke support a week later and MACD moved below its signal line. Despite this new high for the move, price did not exceed the upper band, which was a warning sign. After a pullback below the 20-day SMA (middle Bollinger Band), the stock moved to a higher high above 17. Price exceeded the upper band in early September to affirm the uptrend. Additionally, the MACD formed a bearish divergence and moved below its signal line for confirmation.Ĭhart 5 shows Pulte Homes (PHM) within an uptrend in July-August 2008. The M-Top was confirmed with a support break two weeks later. Even though the stock moved above the upper band on an intraday basis, it did not CLOSE above the upper band. The stock moved above the upper band in April, followed by a pullback in May and another push above 90. Final confirmation comes with a support break or bearish indicator signal.Ĭhart 4 shows Exxon Mobil (XOM) with an M-Top in April-May 2008. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal. Third, prices move above the prior high but fail to reach the upper band. Second, there is a pullback towards the middle band. First, a security creates a reaction high above the upper band. A non-confirmation occurs with three steps. Bollinger suggests looking for signs of non-confirmation when a security is making new highs. However, the reaction highs are not always equal the first high can be higher or lower than the second high. In its most basic form, an M-Top is similar to a double top. Double tops, head-and-shoulders patterns, and diamonds represent evolving tops. According to Bollinger, tops are usually more complicated and drawn out than bottoms. Bollinger uses these various M patterns with Bollinger Bands to identify M-Tops, which are essentially the opposite of W-Bottoms. M-Tops were also part of Arthur Merrill's work that identified 16 patterns with a basic M shape.
Chart 3 shows Sandisk with a smaller W-Bottom in July-August 2009. Fourth, the stock surged with expanding volume in late February and broke above the early February high. Even though the 5-Feb spike low broke the lower band, the signal is not affected since, like Bollinger Bands, it is calculated using closing prices. Third, the stock moved below its January low and held above the lower band. Second, there was a bounce back above the middle band. First, the stock formed a reaction low in January (black arrow) and broke below the lower band. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break.Ĭhart 2 shows Nordstrom (JWN) with a W-Bottom in January-February 2010. The ability to hold above the lower band on the test shows less weakness on the last decline. Third, there is a new price low in the security. Second, there is a bounce towards the middle band. This low is usually, but not always, below the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. In particular, Bollinger looks for W-Bottoms where the second low is lower than the first but holds above the lower band. Bollinger uses these various W patterns with Bollinger Bands to identify W-Bottoms, which form in a downtrends and contain two reaction lows. W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape.
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