Tuesday, April 22, 2008

A Brief Look at Bollinger Bands

The following chart shows a gold index called the Dow Jones United States Precious Metals index, (DJUSPM). The index has a different gold stocks composition than the HUI or XAU Indices, and, as such, can sometimes give you a different perspective.


The main point in the above chart is that this index continues to trade sideways, within a very narrow band. As this is occurring, the bollinger bands are beginning to tighten, and the width of these bands are shown in the indicator on the bottom panel.

In my opinion, explosive moves, either up or down, are preceded by times of extremely low volatility.

2 comments:

The Word said...

This very short post actually begs a lot of questions.
What do the different weighting scheme of the various indexes provide in terms of different information for your trading decision process?
Did the BB tighten on the other indexes. If so, does it add to your forecast of an explosion. If not, what now my love...

The Word

Danny Merkel said...

I think the index I posted in the short post has only American gold stocks, whereas the HUI or XAU has a more Canadian bent.

The bollinger bands were contracting on all indexes I was looking at.