STOCK SELECTION THROUGH BOLLINGER BAND

I have already explained what the technical indicator Bollinger Band means and ways to interpret it. Here we will apply this tool for stock selection and timing of entry.

Figure 1

Consider the example of ICICI Bank in Figure 1. Ellipse 1, 5 & 6 establish that when the actual prices tend to hug either the upper bad or the lower band, it is time for a reversal of prices. Secondly, ellipse 2, 4 & 6 demonstrate that when the neck of the band narrows in either and uptrend or a downtrend, it indicates a lull before a storm and prices blow away in the opposite direction of the trend. We will see sharp movement when the neck narrows. In so far as selection of ICICI Bank now, that is from tomorrow, although the actual prices have hugged the lower bound, they have gone outside the band, indicating that the downward trend will continue. Further, as the band has widened indicating increased volatility, prices will not rise sharply. So it may be advisable to pick it up later in the week.

With a Book Value per Share at Rs. 478.31 and EPS at Rs.44.73 as on 31.3.2011, ICICI Bank’s Price to BVPS as on 12.8.2011 was 1.96 and P/E multiple was 21. Considering a reasonable P/E ratio at 18 say, the price should be around Rs.810 levels. This was the price of ICICI Bank in September 2010. However, the Price to BVPS ratio is quite strong and buying at the current levels is also not too bad. Additional purchase on further dips is advised.

Figure 2

The reader is advised to carry on their own analysis of Oriental Bank of Commerce (OBC) in terms of the Bollinger Band given in Figure 2. I see prices falling in the coming week. However, note that the BVPS of OBC was Rs.349.97 and EPS was Rs.51.51 as on 31.3.2011. Thus, as on 12.8.2011, Price/BV was 0.94 and P/E multiple was 6.4. These parameters make this stock a good  buy at current price levels.

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