Using Bollinger Bands

There are three lines used for the Bollinger band indicator: the upper, lower, and the simple moving average that is between the two. These upper/lower bands are plotted two standard deviations away from a simple moving average. Standard deviation is a measure of volatility; therefore Bollinger Bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen and they contract during less volatile periods.

   The closer the prices move to the upper band, the more overbought the stock is. The closer the prices move to the lower band, the more oversold the stock is. Below is an example using General Electric (GE). Bollinger bands are blue for the lower, green for the average, and red for the upper band:

We have circled three key points on this chart. The blue circle is where the stock price started to create a "base" on the lower band, it appeared that the stock was over sold. Buying at this point would have been a wise choice, as the stock
proceeded to jump 20% or more in the next few weeks.
The two red circles are areas where the stock price was touching or breaking through the upper red band. This is usually an indication that the stock is over bought. In both instances, the stock dropped substantially in following weeks.
The Bollinger bands are a good tool to use, but as we've been preaching all along, never invest solely based on what just one indicator says. Notice there were instances when the stock touched the upper or lower band and did not react. Rather
than basing their investment decisions on Bollinger, many investors use this indicator mainly to solidify a decision they are about to make.

Resistance and Support
Support and resistance are price levels at which movement should stop and reverse direction. Think of Support/Resistance (S/R) as levels that act as a floor or a ceiling to future price movements.

Support - is a price level below the current market price, at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower.

Resistance - is a price level above the current market price, at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher. One of two things can happen when a stock price approaches a support/resistance level. The first is, it can act as a reversal point, in other words, when a stock price
drops to a support level, it will go back up. The other possibility is that S/R levels reverse roles once they are penetrated. For example, when the market price falls below a support level, that former support level will then become a resistance level when the market later trades back up to that level.

The chart above shows an excellent example of support and resistance levels for General Electric (GE). Notice that once the stock price penetrated below the support level in December, it became the resistance level.
Another characteristic you should understand is that S/R levels vary in strength, leading to certain price levels being designated as major or minor S/R levels. For example, a 5-year high on a bar chart would be a much more significant and useful resistance level than a 1-month resistance level.