Follow Up On the Dow

In an earlier post, I showed a chart of the Dow (DIA) and commented that the index looked like it was nearing a short-term bottom. One indicator I referenced was the Bollinger Band Width (BB Width) and I pointed out that it showed a reading of 15, the highest since July of this year. Well now the BB width indicator on the DIA chart is clocking in above the 25 mark, approximately 10 points above it's most recent high reading. So what does this mean? For starters, it says that we're most likely even closer to a short-term bottom. The BB width is a dynamic volatility indicator, similar to the VIX or the Average True Range. Generally, a high reading on the VIX, ATR or BB width will signal extreme volatility which is quite often an early signal of capitulation or a bottom (or a top in bull markets).

The nice thing about the BB width is that it is computed for the individual instrument (stock, bond, currency, etc.) as opposed to the VIX, which is a general volatility index that represents the entire market. For this reason, a reading of 25 on the Dow will be high but that same reading may not be high on a different stock or index. You have to compare the levels for each individual security, which is nice because you can use it in conjunction with other indicators to formulate buy/sell signals. Currently, the BB width on the Dow is a screaming buy, but we'll just have to wait and see how it plays out. Good luck out there.

TLT