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Are the “modified Bollinger Bands” Too Compressed? (Preview)

By Lawrence G. McMillan

John Bollinger has done a lot of work discussing the ramifications of the width of Bollinger Bands. In short, if the Bands are too close together (too compressed), then volatility is “too low,” and the market is due for an explosive move – probably to the downside. Conversely, if the Bands are quite far apart, then volatility has gotten “too large” and a contraction in volatility – and probably a stock market rally – is at hand.

modified Bollinger Band

We’ve put together the graph above, which shows the width of the +/-4ó ‘modified Bollinger Bands” through 2019. The top (blue) line on the chart is merely the distance (in $SPX points) from the +4ó Band down to the –4ó Band. The bottom (pink) line is the chart of $SPX itself...

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