Swing trading the Bollinger Bubble

I currently trade 1 primary pattern, which is a positive “swing low” reversal.  If you are unfamiliar, you can read a detailed summary about how I trade and what I look for in a swing trade.

I’ve been looking at a new pattern for months and formulating a way to trade it.

I like to call it “The Bollinger Bubble”.

Take a look at the pattern of TVTY:

bollinger bubble, bollinger band expansion, widening bollinger band
Nice huh?

You are probably thinking…”That’s horrible.  Look at that ugly drop!”

Ok, I’ll give you that.

But look at what happens after that sharp drop.  It doesn’t look like much, but there is money to be made here.  This was a good swing trade opportunity that lasted for about 2 weeks after that drop.

However, I’m not trading every single sharp drop that is out there though.  That’s pure suicide.

I’m not going to try to catch a falling knife and simply guess, hope and pray that there will be a bounce.

With this new prospective pattern, I’m looking for signs that there will be a safe entry point, an area to get in quietly and play the bounce from that deadly drop.

Before I get too far along, let me show you a few chart patterns that I AM NOT looking for:

bollinger band expansionBollinger band expansion, slow decline

The first chart does have a nice “bubble”, caused by a sharp, single day decline, but it’s not ideal.

Look at how it traded before the decline…small trading ranges with small tails.  It’s a flatline stock

Look at how it behaved after both of those sharp drops.  Just flat-lined along.  There is no bounce in to this stock’s step.  Not even a “dead cat bounce”.  This stock is beyond dead.

Ok, then take a look at the second chart…Yes, the Bollinger Bands did expand, but the Bollinger Bands did not have that nice rounded top and rounded bottom.

This stock is just keeping a steady march down and down, day after day.  I swing trade-off of sharper declines, where the emotions are sharp and urgent.  The bottom Bollinger Band did not move sharply down, but slid lower day after day, week after week.

This pattern is also boring…and painful.  I don’t see any clear point to get in along this move down, do you?  On the last day that printed on this chart, I would not be confident that this stock should turn higher.  Yes, there is a white candle on the last day, but so what?  Who is to say it doesn’t just continue to march lower?  Earlier on the march downward, there was another white candle, a hammer.  It kept heading lower after that.

No thanks for either of these two patterns!

Two ways to Swing Trade trade the Bollinger Bubble

I am looking to trade a sharp decline like this in two ways:

  1. An entry within a few days of the sharp decline, but only if it lines up with prior support levels.
  2. An entry into a stock that had a “Bollinger Bubble”, but traded sideways for a significant time (weeks/months) and is finally showing signs of life with a move higher on increased volume.

First let’s take a look at the first option…getting into a Bollinger Bubble drop relatively quickly.

Take a look at the chart below.

It is the same stock chart (TVTY) that I showed you earlier, but now I want to  specifically point out , what I see.

First, I want the stock to pierce the lower Bollinger Band, and then start to move back into the “bubble”.  I want to see a stock that is moving horizontally into the bubble, or slightly higher moving in at an upward angle.

This is doing just that.  On the chart, I broke down each day’s action.  Each one tells a story of where this stock is headed.

First, a doji or spinning top candle shows indecision.  They say that a doji candlestick pattern is right 100% of the time, because it tells us that a stock could move up, down or sideways! 🙂

The second day, we have relatively tall white candle, with hardly any tails.  That shows fairly confident buying.

The third day we have a decline, but it is a small red candle, where the trading action is in the top half of the prior day’s trading.  A decline, but this certainly isn’t a huge sell-off day.

The fourth day, we have an up day, where the stock traded higher, came down, but still closed higher.

Now look at day five…a nice, huge white candle, hardly any tails.  You could have purchased by day two, or three or four.  But at this point, day five, wouldn’t you have confidence that this stock isn’t going to fall apart any further and collapse?  Day five is a high probability trade.  Relatively low risk and high reward (in my opinion).

This is what I am looking for with scenario one of the “Bollinger Bubble” swing trade.  It is important to study each successive day’s trading action and analyze the candlesticks.  They will tell a story about what everyone thinks about the stock’s sharp decline and whether it was overdone.  In this case, there is some relatively confident buying.  The decline was overdone and there is some value there.

I have found that this type of action usually occurs at a point where there was a prior trading range in the weeks or months prior.  That marks an area of support.  When I see a Bollinger Bubble like this show up on one of my screens, and the current price is at a level of prior support, I’m putting it on my watch list.  Each day, I’ll monitor the trading action to see if it is worthy of a high probability swing trade..just like I showed you here with TVTY.

Ok, let’s look at scenario two, where we have a sharp decline, a Bollinger Bubble, but afterwards we have a long base forming.

Here is the second option – Entering after a base has formed:

bollinger band, large drop, base formation
Here you can see the bubble formed from the sharp decline.

The stock started to move into the Bollinger Bubble and then started forming a consistent base.

The particular screen I created that caught this stock has 3 major components:

  1. A look-back period of a month, screening for a sharp drop.
  2. Then watching for a narrow trading range after the drop.
  3. And finally, signs of life as the stock starts to move higher inside of tightening Bollinger Bands…a squeeze.

As the stock trades sideways and the volatility from the sharp drop subsides, a nice base has formed.  The key is to have a sideways base and then suddenly a change…a sign of life where the stock starts to behave differently, moving towards the top of the trading range on higher volume.

Before I enter a trade, I look very carefully at the trading action of the prior 3-4 days by looking at the daily candlesticks, as well as reviewing the hourly and 15 minute charts to fine tune an entry.  In this case, look at those two white candles that preceded the huge white candle.  They were moving towards the top half of the trading range/base.  In addition, the volume had been increasing.

For this pattern, it is a good idea to create a buy-stop near the top of the trading range so you catch a sharp move like we see that started with that tall white candle.

As a sidebar…look at how history repeats itself. 

The prior chart’s action was bubble #1.  Look at how we had a second bounce that occurred (Bubble #2) moving off of the exact same support level.

Here is another chart.

Here again, you can see the nice “bubble” and then the sideways move into a tightening Bollinger Band squeeze.  It recently is showing signs of life after 4/23 around the $5.75 mark, moving into a higher trading range.  It also pierced the top Bollinger Band.  Also notice how the volume started to expand.

So there you have it…a new potential pattern that I am going to devote a few trades to.  For years, I have been swing trading off of a simple, basic pattern that has proven to be repeatable (and profitable), so I don’t take adding a new pattern to my trading screens lightly.

I’ll continue to monitor and adjust my technique on this pattern and enter a few trades here and there when I see a “Bollinger Bubble” that fits the bill.

If you have any thoughts, or anything to add…let me know!

I’ll keep you updated.  If you aren’t on my mailing list for blog post updates, you can sign up here.

Until next time, trade safe and don’t get too greedy!


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