Bollinger Bands Extreme Pinch

As of late, I feel a bit like The Boy Who Cried Wolf while highlighting various technical developments that have historically lead to corrections in the stock market such as trading volumes falling to extreme low levels, negative divergences that continue to build, etc...  yet the market continued to hold up. Some say this time it's different because __________ (fill in the blank: market intervention by the Fed, zero interest rates forcing bond investors to buy dividend stocks, corporate share buybacks, etc...)  Of course, we all know how Aesop's famous fable ended.

SPY Bollinger Bands Width 8-22-16

SPY Bollinger Bands Width 8-22-16

While the vigor of the rally off the June 27th lows and more recently, the resiliency of the near-sideways trading range/refusal of stocks to move lower over the last month just can't be denied, neither can the fact that those same warning signs that have historically preceded corrections in stock price have not abated, rather continue to build. As this 7-year chart of SPY (S&P 500 tracking ETF) highlights, every time the Bollinger Bands have pinched to such extreme levels (as defined by the blue horizontal line on the BB Width window at the bottom of the chart), corrections in the %5+ range nearly immediately ensued.

Could this time be different? Certainly, as anything is possible. However, this recent development, along with some of the other extremes highlighted here in recent weeks, simply means that the probability of a substantial pullback in the market is very much elevated at this time, despite what appears to be an extremely resilient trend. As such, long-side breakouts face an increased rate of failure and/or falling shy of their measured price targets while the risk of a potentially swift selloff, especially given the proper catalyst, remains elevated at this time.

2017-03-08T21:19:33+00:00 Aug 22, 2016 11:16am|Categories: Equity Market Analysis|Tags: , |6 Comments


  1. snp August 22, 2016 11:36 am at 11:36 am

    maybe the Bollinger band needs to start playing a different song


  2. alshaw August 22, 2016 11:49 am at 11:49 am

    bottom line we are going higher much higher


  3. Art August 22, 2016 12:16 pm at 12:16 pm

    I for one do not believe that this time is different and regardless of of this extreme the market is in, Price can be deceptive and not as it seems for the larger picture of accumulation and distribution.


  4. joefriday August 22, 2016 12:25 pm at 12:25 pm

    Yep..could’nt; agree more. The writing is on the wall..but very aggravating waiting for price to finally get the message and correct… As I’ve noted, in addition to the BB squeeze on the daily chart there is also a Monthly BB squeeze in progress too…that move could be huge..and as of is also suggesting the move will be lower..


  5. rsotc August 22, 2016 12:38 pm at 12:38 pm

    As I often say, just because something (in the charts) has worked in past does not mean that it will or must work again going forward. My take-away from all this is that while the market has so far refused to correct in spite of bearish developments that have preceded corrections in the past, it has taken out or “burned through” those developments, yet either. It could very well go on to do so but until then, I don’t think it wise to become complacent & dismiss those technical developments just because they haven’t played out for a correction up to this point.

    In fact, those bearish developments, such as the negative divergence & plunge in trading volumes, only continue to build to even more powerful extremes. As such, until & unless the market can rise to the point where those red flags not longer exist (i.e.- no more divergence, a healthy expansion of volume with prices moving higher, an upside price thrust out of the recent price compression/pinched Bollinger Bands, etc…) then it would only be logical to assume that the next correction, once it comes, will be commensurate with the scope of these extreme bearish technical developments .


  6. lee1 August 22, 2016 3:01 pm at 3:01 pm

    Yup, higher we will go.


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