NewCycleTrading

Bollinger Band and T-Line Timing

Education
SP:SPX   S&P 500 Index
Here is a method to track current trends and spot reversals.

This technique combines two separate indicators, the Bollinger Bands (BB) and the T-Line.

Bollinger Bands contain three parts. First is a 20-period simple moving average , the middle band (purple line). Second is the upper band and third is the lower band (blue lines). Both of the upper and lower bands are two standard deviations away from the middle band. This sets up a powerful and visual summary of historical volatility . Thus, price is unlikely to trade above the upper band or below the lower band. When price does move outside of these ranges, it retreats back into range very quickly. So, Bollinger Bands are a great “probability matrix” to time and control both entry and exit.

Rick Saddler coined the term “T-Line”. The T-Line (red line) is an 8-day exponential moving average of price that yields surprisingly reliable signals for changes in price direction. The general rule is that when price is above the T-Line, it remains bullish until it crosses below and closes for at least two sessions. This sets up a bearish reversal. When price is below the T-Line, the prevailing bearish trend continues until price crosses above and closes above for at least two consecutive sessions.

Taken apart, Bollinger Bands and the T-Line are powerful on their own. However, when used in combination, you set up a dynamic trading range, making it easy to spot when a trend begins and ends. As price advances, the BB upper band represents resistance and the T-Line is support. When prices are moving lower, the T-Line is resistance and the BB lower band is support.

The chart for the S&P 500 (SPX) demonstrates the trend and exit signals this combination provides.

The first crossover in early February was bullish , marked by the move of price above the T-Line. Price moved up over 45 points to the high before the crossover reversal.

In late February, price was trending lower with considerable strength and many gaps. The retracements occurring in the second week could have been viewed as reversals, except for one important signal: Close price remained below the T-Line from February 24th entry at 3226 all the way down to End-March when it traded at a low of 2192. Price did close above the T-Line toward the beginning of March, but immediately crossed back and closed below the T-Line the next day. Since price did not close above the T-Line resistance for two consecutive sessions, this bearish trend continued. This was further supported by the BB lower band, marking dynamic support.

On February 27th, price broke the Bollinger Band Support and created a Bollinger Band Snap. This could be used as an exit, since price had moved down almost 250 points from the open, resulting in a profit, and price is unlikely to stay trading below the lower Bollinger Band for long. If one exited based on the strong Bollinger Band Snap on February 27th, a re-entry can be taken on March 6th, with a confirmed close price below the T-Line at the 2973 price level and continuing down to about $2192. How would you know when this bearish trend would end? Resistance was marked by the T-Line and support by the lower Bollinger Band . This did not end until March 25th when price closed above the T-Line for the second session in a row, indicating an end to the bearish trend , and a total move of over 750 points.

The third crossover took price back into bullish territory, this time marking the end to a four-week bearish trend and the start of a new bullish move. Price crossed above and closed for two consecutive sessions on March 25th. The S&P 500 moved up over 150 points, before it reversed and closed below the T-Line on April 1st. However, even though most of the price activity took place below the T-Line on April 2nd, it did not close below the T-Line. This type of price activity may warrant a protective stop since the close of the bar was just barely above the T-Line.

Price moved back above the T-Line and continued its move higher with another one day close below the T-Line on April 21st. When did the actual trend exit appear? May 4th, when price closed below the T-Line for the second session in a row.

This combined Bollinger Band and T-Line dynamic trend tracking is reliable and it can be used effectively in many ways. First, as shown at the beginning of the chart, it shows a long entry and provides profit opportunity as the index rises. Second, a crossover, with a confirmed second session close, is the exit point for leaving a current trend, taking profits, or for entering a new trend based on the newly revised price direction. Third, as shown in the February 24th trend, using a Bollinger Band Snap to signal a time to take profits and exit the position as price generally will retrace back inside the Bollinger Bands . Fourth, using a desired profit target based on historical research on the selected underlying and exiting once that profit target is reached.

This solves the most disturbing aspect of short-term options trading. When do you exit a trade? Even with the lack of price-specific reversal signals, the combined use of the Bollinger Bands and the T-Line are a powerful and reliable system to improve timing.


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