Smoothing The Bollinger %b

Bollinger bands were developed by John Bollinger and it consists of 3 lines derived from the moving average and standard deviation of closing price.

Sylvain Vervoort, a Belgium based retired electronics engineer who has been using technical analysis for more than 30 years, came out with an indicator SVE_BB that takes the Bollinger band and converts it to an oscillator that range between 0 and 100 (with overshoots).

The Metastock formula for SVE_BB is

period:= Input("%b period:",1,100,18);

TeAv:= Input("Tema average:",1,30,8);

haOpen:= (Ref((O+H+L+C)/4,-1) + PREV)/2;

haC:= ((O+H+L+C)/4+haOpen+Max(H,haOpen)+Min(L,haOpen))/4;

TMA1:= Tema(haC,TeAv);

TMA2:= Tema(TMA1,TeAv);

Diff:= TMA1-TMA2;

ZLHA:= TMA1+Diff;

percb:= (Tema(ZLHA,TeAv)+2*Stdev(Tema(ZLHA,TeAv),period)-Mov(Tema(ZLHA,TeAv),period,WEIGHTED))/(4*Stdev(Tema(ZLHA,TeAv),period))*100;

percb;

This indicator is often a leading indicator with smooth and clear turning points.  Bullish and bearish divergent signal is helpful in identifying entry and exit points. 

Let’s take a look when this indicator is applied to Sembcorp Marine.

Sembcorp Marine broke out of the Bollinger band in early October and it has managed to blow past the $5 mark to reach a high of  $5.20 on 10 Nov.   The stock has pulled back slightly and it looks set to test the 20 day moving average which is at $4.70 level.

The SVE_BB indicator did not make a new high together with the up swing.  This is a warning signal.  If this divergence coincides with a break of support level, it will be a strong indication of further down moves. 

The stock has to stay above the 20 day moving average.  If it breaks this line, the next support line is at $4.50.