Bollinger Bands can strongly signal the end of a trend. This adds to the obvious benefit and predictability of Bollinger Bands as a “probability matrix” in which the likely range of dynamic price movement is easily tracked.
Even with an array of technical signals worthy of tracking, Bollinger may set up a price pattern called the M top. This is when price forms an M shape in anticipation of a coming downward reversal. The pattern is not easy to find, but when it appears, it should not be ignored.
An example of a chart with an M top is seen on Tesla (TSLA). Note the highlighted M shape. The idea here is that very much like head and shoulders, double and triple top, or tweezer top, the M top anticipates a bearish reversal followed a failure to move price higher.
The M shape is only one half of the required pattern distinction. The second requirement is that on the last upward leg of the M, price has to close above upper Bollinger at least on one session. On this chart, two sessions closed above upper band, as marked on the chart.
On this chart, support appears at approximately $340 and the M concluded below that level. However, this is one of those cases where a delayed reaction took place. Price moved higher after conclusion of the M shape, and consolidated between $345 and $360 for two weeks. Then the anticipated reversal hit – fast and strong. Price moved from $360 all the way down to $300.
This pattern, even with the delay, demonstrates the potential strength in the M top. Of course, other influences like earnings surprises and product announcements, ultimately determine price direction. The technical price patterns based in signaling systems like Bollinger Bands, frame the timing and momentum of price reaction to both technical and fundamental developments.
In the case of the M top, expect to see very strong bearish reaction, as the Tesla example revealed. But also expect some uncertainty. The delayed reaction is typical but is easy to spot as well. The hesitation is price direction, often represented by a brief period of narrow consolidation, is one example of this. Others include failed breakouts in the opposite direction, a Bollinger squeeze before the big price reversal, or a narrowing of bandwidth right before the reversal kicks in.
In fact, the Tesla chart revealed exactly that as further confirmation of a coming bearish reversal. Right before prices dived lower, bandwidth went from 60 points at the beginning of October, down to 25 points of October 18, where the downtrend started. That 60-point drop in price was anticipated by the M top and confirmed by the big decline in volatility (bandwidth) in less than three weeks.