SLV showing contracting Bollinger bands

Nature is cyclic. Humans are part of nature, and markets are made of humans. Therefore markets are cyclic. Volatility is like a tide that ebb and flows. The Bollinger band is visual depiction of price volatility in that it is designed to contain prices within it 95% of the time. When prices are stable and not doing much, the band likewise will not change a lot. When prices change quickly, higher for instance, the band must rapidly expand to contain the price action. Lower prices then require the band to contract. The Bollinger band therefore is always in a state of expansion and contraction, constantly changing to reflect price volatility.

Extremes within a cycle always signal change. The Bollinger bands are no different. A contracting Bollinger band in SLV is indicating lower volatility. The band has narrowed to a degree that historically indicates an extreme. Therefore the band is warning that volatility is likely going to increase and lead to an expansion of the band. It does not tell us the direction of price volatility unfortunately. It could be up or down. That call must be made with the help of other indicators and studies, including fundamental analysis.

The ovals highlight periods of contracting bands. Each contraction was followed by rapid expansion. This is as natural as breathing in and out. SLV is going to be breaking out one way or another. My bet is that it follows gold higher.

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via StockCharts.com
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