108 Envelope

It is a percent band placed on the SMA. Envelopes are a good indicator for trend identification as well as identifying overbought and oversold conditions.

For instance, a 10% envelop:

Basis = 20 Period SMA

Upper Envelope = 20 Period SMA + (20 Period SMA x 0.1)

Lower Envelope = 20 Period SMA - (20 Period SMA x 0.1)

Frequently, during a strong, clearly defined trend, a breakthrough into overbought or oversold territory is a sign of strength. This can be used to confirmed the likelihood of a continuing trend.

During a Bullish Trend, a breakthrough above the upper envelope can be seen as a sign of strength and the uptrend is likely to continue.

Figure 12.12: Envelope

When a market is choppy or trading sideways, Moving Average Envelopes can be useful for identifying overbought and oversold conditions. These conditions can typically lead to price corrections where price moves back towards the moving average.

Figure 12.13: Envelope