Bollinger Bands offer a rich variety of signals in many ways. The bands track resistance as prices trend higher, and track support as prices move lower. The Bollinger squeeze anticipates coming reversal or breakout from consolidation. The combination of the bands and the t-line add great value in identifying channels and when they are likely to end. Burt there is more.
The W bottom is a price pattern that identifies likely bottom in price and a coming bullish reversal. The chart for SPX contains two examples of the W bottom, and as expected, this is followed by a strong bullish move. This ended a period of consolidation, when prices were range-bound between $2,420 and $2,480.
The first took place from mid-June to mid-July and set up a pattern like the letter ‘W.’ This is one requirement for identifying the reversal. The pattern, much like an inverse head and shoulders and many other bullish reversals, moves downward twice but fails to continue.
Another requirement, one that must show up to make it a legitimate W bottom, is that the second price dip – the last downward leg of the W – has to move below the Bollinger lower band. This move occurred only once, but it is significant. The fact that price immediately retraced back into the range above lower Bollinger band, was the first hint that a breakout was likely to the upside. However, the upward retracement stopped at the $2,420 resistance.
The second W bottom confirmed that the consolidation period was ending, It took place through most of August. Two sessions closed below the lower band, setting this up as the real deal for the W bottom.
Once the W formation concluded, but failed again to sustain price above resistance of $2,420, the timing was unclear for reversal. The matter was settled finally on September 11 when price gapped higher and moved through resistance. As shown by the trendline, this was the beginning of the breakout and a new, strong bullish move that lasted until November 9, two months later. In that two months, price moved from $2,420 (previous resistance) up to nearly $2,600, a 180-point advance.
Like many strong reversal signals, the W bottom is exceptionally strong. They are difficult to locate, however. So finding tow W bottom formations on one chart only adds to the strength of the signal. The second W bottom confirms the first. And the move of price below lower Bollinger band adds additional confirmation. Look for the W bottom to spot the end of either a downtrend or a consolidation trend.