A moving average Envelope creates a channel that parallels a moving average, and it allows you to identify the trend and use the upper and lower boundaries as Support and Resistance Levels. But unlike Bollinger Bands, the moving average Envelopes have the same distance between the upper and lower bands.
Moving average envelopes are effective tools not only for identifying Support and Resistance, but also for helping to establish limit and stop orders. An envelope is created by plotting a Simple Moving Average, then plotting two additional lines parallel to the moving average – one line above the moving average line and one below the moving average.
Envelopes can be used to place stop and limit orders, and also to identify Support and Resistance Levels as shown in Figure 37. When the stock bounces up off the lower band, it indicates a Buy Signal. Sell Signal enables you to set your profit target at the Upper boundary of the Envelopes.
A break above the Upper Band often signals a new bullish trend is underway. Conversely, if the stock breaks below the Lower Band this could signal a new bearish trend developing. Like many Technical Indicators, these signals should be analyzed in the context of the current trend and other Support and Resistance Lines established by Tradespoon’s analytics or other indicators.