® AIQ Opening BellMonthly IN THIS ISSUE VOL. 6 ISSUE 2 FEBRUARY 1997 TRADING TECHNIQUES Feature John Bollinger discusses his Bollinger Bands .................. 1 AN INTERVIEW WITH JOHN BOLLINGER Se ctions account program, what percent of the By David Vomund investments are in equities and what is Price Volume Divergence your average holding period? Report .................................. 5 his month we are pleased to JB: We are primarily equity Market Review ..................... 8 present an interview with John investors. We dont buy any futures. Data Maintenance ............... 8 Bollinger, a keynote speaker at Our growth model is currently allo- Tour March seminar in Dallas. Mr. cated approximately 60% to the stock Bollinger is market, 20% to the president of bond market, and Bollinger Capital 20% to the interna- Management. He tional stock mar- provides money ket. We are management primarily interme- services and diate term traders. publishes the Our research tends Capital Growth to center on a Letter. He is best holding period of known for his three to six months Bollinger Bands, with most of the which is a feature emphasis on six in TradingExpert. months. However, For information on that doesnt Bollinger Capital preclude us from The Opening Bell Monthly Managements John Bollinger, CFA, CMT taking advantage is a publication of products and of short term AIQ Incorporated services, call 310-798-8855 or write to opportunities, for example when we see David Vomund, Chief Analyst P.O. Box 3358, Manhattan Beach, CA an attractive technical non-confirma- P.O. Box 7530 90266. Send e-mail to tion. Incline Village, Nevada 89452 [email protected]. DV: Im often asked what my favorite DV: Thank you for joining us for this indicators are. Since you have an indicator interview. To begin with, Id like to ask you named after you, I guess I know what your about your trading style. In your managed favorite indicator is. Trading Techniques continued on page 2 AIQ Opening Bell TRADING TECHNIQUES continued . JB: Well, I distinguish between Figure 1 trading bands and indicators. Bands, whether they be Bollinger Bands, AIQ Bands, or percentage bands, provide a useful definition of what is high or low at any given point on a relative basis. With that in mind, well check the action of the indicators to deter- Squeeze mine whether that relative highness/ ä lowness of the security is confirmed. For example, if we were to rally up to an upper band but the indicator we ä ä have chosen was below the middle of ä ä ä ä Small W Big M Small W its normal distribution, that would be an unconfirmed event with bearish implications. DV: Do you use different bands for different types of analysis? JB: Yes. I find different bands are good for different purposes. For example, I find Bollinger Bands are very useful for identifying short term M and W tops and bottoms, achieved a new low on an absolute percentage of market action over a especially when the first part of the level. given period are very useful. For formation is occurring outside the Several good examples are found cycle identification, J.M. Hursts hand band and the second part is occurring drawn nested bands are very useful. inside the band. In the case of a W in Sun Microsystems (SUNW). We bottom, the bands allow you to see in Figure 1 that on July 16 to July DV: What indicators do you prefer correctly diagnose a bottom even if 24 and again on December 31 to in conjunction with the band analysis? the second part of the formation is January 10, SUNW had a downward JB: My favorite indicators all lower than its previous low. If you move that was sharp enough to have one thing in commonvolume. are outside the lower band on the penetrate the lower band. The stock When we analyze a stock from a first probe down and the second rallied and then the second move technical perspective, we have a probe down occurs inside the band, down occured within the bands. relatively limited data set. You have then by definition you have a price Both patterns were nicely confirmed a reference to time, you have the price divergence W bottom on a relative by the Split Volume Moving Average at the beginning and end of the time basis, even though prices may have indicator. There was a squeeze in period, and you have the highest and early September which typically leads lowest price recorded during that to high volatility. In October, there PLEASE SEND CORRESPONDENCE TO: time period. The problem is that was an M topping pattern that these variables are used in basic trend Opening Bell Monthly occured over a longer time period analysis, momentum analysis, and G.R. Barbor, Editor than the W bottoms. the creation of moving averages. P.O. Box 7530 Incline Village, NV 89452 Moving back in time, an M top People might choose to concentrate occured in December 1995 and then a on the RSI, Stochastics, Directional AIQ Opening Bell Monthly does not intend to make trading recommendations, shorter term W bottom occured in Movement, and the MACD. They nor do we publish, keep or claim any track January 1996 (see Figure 2). Using think they have three or four different records. It is designed as a serious tool to Candlestick charting, big black indicators and are deploying a weight aid investors in their trading decisions candles marked the downward move of evidence approach but the fact is through the use of AIQ software and an in mid-December and big white that only a couple of those indicators increased familiarity with technical indicators and trading strategies. AIQ candlesticks marked the upward are usefully differentiated from one reserves the right to use or edit submis- reversals. another. sions. For the identification of interme- In our analysis we look for For subscription information, phone diate term overbought/oversold indicators that are not strongly 1-800-332-2999 or 1-702-831-2999. levels, bands such as the AIQ Bands collinear to the price based analysis. © 1992-1997, AIQ Systems or Bomar Bands which contain some Thats where volume comes in. It is a 2 FEBRUARY 1997 AIQ Opening Bell TRADING TECHNIQUES continued . index. Both a one and a two year Figure 2 correlation test are used. Because Im trying to capture a broader data set and want a lot of stocks in the struc- Big Black Candles ture, I use a much lower correlation test than AIQ employs for its Pyra- ä ä mid structure. Whereas you use a correlation threshold of 500, Ill go as low as 200 for a very diffused group. This is very time consuming and ä would be impossible if it were not for ä MatchMaker. Big White Candles DV: How do you use TradingExpert to spot group rotation? JB: I use some of the reporting features in TradingExpert and have created some models of my own. What is great about AIQ is that you can now export the group data files using your utility package. I import this data to spreadsheets and other analytical programs and then mas- variable independent of price action. DV: You are an AIQ user. Which sage the data to fit my needs. The Therefore, we look at things like parts of the program are part of your momentum of groups is very impor- Positive Volume Index, On Balance trading process? tant so in my own program I sort the Volume, and Money Flow. groups in terms of their changing JB: I look at the reports for ideas momentum. Rather than buying into DV: The AIQ software provides and am very heavily involved with a trend, Ill typically identify groups both a Positive Volume Index (PVI) and group analysis. that have been out of favor but whose a Negative Volume Index (NVI). One DV: Which industry group struc- momentum is turning strong. indicator measures price activity on ture do you use? heavy volume days while the other I particularly like AIQs Group JB: measures volume on light volume days. I I have created my own Analysis Report. When I use this find it hard to justify the validity of both industry group structure based on a report, Im interested in groups that indicators. When both indicators are blend of fundamental and technical are on the move. These groups have rising for a stock, the only thing this tells ideas. This structure was created been low in the report but are begin- me is that the stock is going up. How do because the existing structures ning to accelerate upward. They are you use these indicators? modeled the modern stock market most easily identified by a large rather poorly. That is, business and positive Delta Trend Score reading. It JB: I agree. In my work and the industry had evolved but most of the is especially attractive if they acceler- work of colleagues that I really existing structures have not. Our ate up in the list when the action is respect, we found the PVI is a good structure contains 15 sectors and 130 relative rather than absolute. In other confirming indicator whereas I have groups. Many groups are very words, if a group that was near the never been able to find much use for modern. For example, there is a bottom of the list is now starting to the NVI. If you have tagged the media sector and within this sector is rise in the list at the same time that upper band accompanied by very a studios group. It is a simple but the market is rising, that suggests positive PVI, there really isnt any focused configuration.