Capture Price Moves on the “M” and the “W” to make 100% Gains by Monday’s Market Close

The March jobs report was released this morning, showing that the U.S. added 215,000 jobs, which is up from economists’ projection of 203,000 jobs.

These numbers further add to the increasing level of confidence consumers have about the economy and investors have about the markets…

And this means that we could be looking at some great trading opportunities with triple-digit profit opportunities next week.

On Wednesday, we talked about Bollinger Bands and how you can use them to play this rising investor confidence.

And as you’ll recall… I mentioned that there are two key technical patterns to follow when using this tool.

Today, I’m going to show you exactly what they are and how you can use them to maximize your profits before the bell rings on Monday.

Let’s get started.

The Best Trading Pattern Duo to Use with Bollinger Bands

Earlier this week, we talked about the basics of Bollinger Bands. Today, I want to spend time showing you two trading pattern setups to use in tandem – one at the top and the other at the bottom of the Bollinger Bands.

The idea is to capture a trade opportunity that is a reversal-type trade. What I mean by this is that the trade will look to capture a price move off either of the outer bands to either the mid-point of the Bollinger Bands, which is the simple moving Average (SMA) that the bands are plotted around…OR… A move off one of the bands to the other (or opposite) band.

Now there are multiple setups you can use with Bollinger Bands, but what we’re going to look at today are ones that I favor. For more on how to utilize this indicator, I consider John Bollinger’s first book, Bollinger on Bollinger Bands, an essential read.

Before we get into these two patterns, let’s recap the three patterns (or movements) we looked at on Wednesday:

The Squeeze

In periods of low volatility, the bands will tighten and get closer and closer together to the point where they run almost parallel to the stock price, and there isn’t a wide chasm between the two.  Also, the stock at this time of low volatility tends to trade in a sideways trending nature.

bollinger bonds squeeze

Expansion

As volatility starts increasing, the price will start breaking out of this sideways trend. When this starts happening, the stock will start to breakout to the upside and touch outside (or at times exceed) the upper band. In the event that the move is to the downside, the stock will touch (or at times exceed) the bottom band.

Then, the stock will continue to move in that direction if the move proves to be valid, causing more traders and investors to buy or sell.

(Image by www.incrediblecharts.com)

Walking the Bands

The stock will sometimes show that the commitment of traders is greater than normal in that the slope of the move will be steeper. When this happens, the stock will trade along the upper or lower band in that steep slope in a move that’s known as “walking the bands.”

(Image by www.incrediblecharts.com)

Now let’s talk about my two favorite patterns to use with Bollinger Bands.

“M” Tops and “W” Bottoms

There are times when the stock price exceeds the outer bands and the price will snap back within the bands. The outer bands can get stretched, but they won’t break, forming ‘”M” tops and “W” bottoms.

These images showing an “M” top and “W” bottom are provided by www.stockcharts.com:

Exxon Mobil M top stock chart
Nordstrom W Bottom Stock Chart

When these “M’s” at the top of the bands and “W’s” at the bottom of the bands appear, they give an indication of the strength of the trend.

Legendary chartered market technician, Arthur Merrill, who Bollinger assisted for many years, identified 16 “M- ” and “W-” formations. Bollinger has incorporated these patterns with his Bollinger Bands to identify these formations, which indicate that a future price move should follow.

A Closer Look at the “W” Bottom

The ideal “w” bottom setup is where:

  1. A low in price occurs, sometimes below the lower band, but not always. Then there’s…
  2. A bounce in price to the middle band (SMA).  Next…
  3. A new low in price should happen, but the price should hold above the lower band. Now a new low in price may not happen, and it will still be considered a valid move for the pattern. Keep in mind, though, it would be more ideal if it did. Finally…
  4. Confirmation of this pattern is achieved when the price breaks above the most recent pivot high or resistance area.  The next two images are also provided by www.stockcharts.com:
Norfolk Southern W Stock Chart

A Closer Look at the “M” Top

The ideal “W” bottom setup is where:

  1. A high in price occurs, sometimes above the upper band, but not always. Then there’s…
  2. A drop in price to the middle band (SMA).  Next…
  3. A new high in price should happen, but the price should hold below the upper band. A new high in price may not happen, and it will still be considered a valid move for the pattern. Keep in mind, though, it would be more ideal if it did.  Finally…
  4. Confirmation of this pattern is achieved when the price breaks below the most recent pivot low or support area.
Exxon Mobil M top stock chart

The more aggressive approach to trading this pattern is to try and trade off the second retrace – either the second high or low.  The more conservative approach is to trade after the breakout of the most recent high or low.

You might find that it’s harder to pick tops and bottoms than if you just try and taking a piece out of the middle part of the move when trading.

As I mentioned above, there are other trading setups you can find and use. I encourage you to read Bollinger’s books to look at more setups.

As for me, my website has a tutorial that shows a few of these. Here’s a glimpse:

toms trading room bollinger bands
ranking explanation trades table

Here’s Your Trading Lesson Summary:

On Wednesday, we talked about Bollinger Bands and how you can use them to profit off of investor confidence. But there are additional patterns to identify when using this technical analysis tool to maximize your reward potential. These are the top two:

  • “M” Tops
  • “W” Bottoms

Have a great weekend!

Tom Gentile

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