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With a day SMA and day standard deviation, the standard deviation multiplier is set at 2. Bollinger suggests increasing the standard deviation multiplier to 2. W-Bottoms were part of Arthur Merrill's work that identified 16 patterns with a basic W shape. Bollinger uses these various W patterns with Bollinger Bands to identify W-Bottoms, which form in a downtrends and contain two reaction lows.

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In particular, Bollinger looks for W-Bottoms where the second low is lower than the first but holds above the lower band. There are four steps to confirm a W-Bottom with Bollinger Bands. First, a reaction low forms. This low is usually, but not always, below the lower band. Second, there is a bounce towards the middle band.

Third, there is a new price low in the security. This low holds above the lower band.

The ability to hold above the lower band on the test shows less weakness on the last decline. Fourth, the pattern is confirmed with a strong move off the second low and a resistance break. First, the stock formed a reaction low in January black arrow and broke below the lower band.

Second, there was a bounce back above the middle band. Third, the stock moved below its January low and held above the lower band. Even though the 5-Feb spike low broke the lower band, the signal is not affected since, like Bollinger Bands, it is calculated using closing prices. Fourth, the stock surged with expanding volume in late February and broke above the early February high.

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M-Tops were also part of Arthur Merrill's work that identified 16 patterns with a basic M shape. According to Bollinger, tops are usually more complicated and drawn out than bottoms. Double tops, head-and-shoulders patterns, and diamonds represent evolving tops. In its most basic form, an M-Top is similar to a double top. However, the reaction highs are not always equal; the first high can be higher or lower than the second high.

Bollinger suggests looking for signs of non-confirmation when a security is making new highs. A non-confirmation occurs with three steps. First, a security creates a reaction high above the upper band. Second, there is a pullback towards the middle band. Third, prices move above the prior high but fail to reach the upper band. This is a warning sign. The inability of the second reaction high to reach the upper band shows waning momentum, which can foreshadow a trend reversal.

Final confirmation comes with a support break or bearish indicator signal. The stock moved above the upper band in April, followed by a pullback in May and another push above Even though the stock moved above the upper band on an intraday basis, it did not CLOSE above the upper band. The M-Top was confirmed with a support break two weeks later. Additionally, the MACD formed a bearish divergence and moved below its signal line for confirmation. Price exceeded the upper band in early September to affirm the uptrend.

After a pullback below the day SMA middle Bollinger Band , the stock moved to a higher high above Despite this new high for the move, price did not exceed the upper band, which was a warning sign. The stock broke support a week later and MACD moved below its signal line. Notice that this M-top is more complex because there are lower reaction highs on either side of the peak blue arrow. This evolving top formed a small head-and-shoulders pattern.

Moves above or below the bands are not signals per se. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. Momentum oscillators work much the same way. Overbought is not necessarily bullish. It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend. Think about it for a moment.

The upper band is 2 standard deviations above the period simple moving average. It takes a pretty strong price move to exceed this upper band. An upper band touch that occurs after a Bollinger Band confirmed W-Bottom would signal the start of an uptrend. Just as a strong uptrend produces numerous upper band tags, it is also common for prices to never reach the lower band during an uptrend. The day SMA sometimes acts as support.