Bollinger Bands, aka Volatility Bands, and Alex’s 2-day Force Index, are two of my favorite trading tools. Bollinger Bands measure volatility, or price range up or down from a baseline (20-day SMA). I use them for a variety of things–squeezes, short-term overbought/oversold, profit targets, and an indicator of potential trend change.

The market’s recent decline is a good example of how the measurement of volatility can help us traders. When the market plunged in late January, the BBs expanded in opposite directions indicating a violent move. The lower band led price down, while the upper band expanded in the opposite direction as volatility increased. The upper band traced above the 115 for several days, eventually turning back toward the lower band as volatility dried up. At the same time, price bounced, then made another plunge ending with a penetration of the lower band, but a close above it, accompanied by a selling climax measured by FI. The end of the move was foreshadowed when the bands stopped expanding away from each other and started contracting.

The more I use the 2-day FI, the more intriguing I find it. Notice that when the SPY was in a bull move, each time there was a retracement, it ended in a FI spike, or short-term selling climax. Interestingly, the deepest spike was at the start of the correction, which indicated we were headed for something much bigger than our previous retracements. Notice that another smaller spike (also indicating bullish divergence) marked the end of the decline. I also marked the mid-February bounce forming a higher low. This bounce was the perfect set up for another move down. The tip-off that we were going to continue down was the inside day bar (on the right in the rectangle), a handy tool in itself.