Moving Average Envelopes consist of a moving average plus and minus a certain user defined percentage deviation. Moving Average Envelopes claim to be an indicator of overbought or oversold conditions, visual representations of price trend, and an indicator of price breakouts. The inputs of the Moving Average Envelopes indicator is shared below:
A chart of the Nasdaq 100 ETF (QQQQ) shows a 20-day moving average with both a 1% and 2% percentage bands:
In the chart above of the QQQQ's, the price is not trending. During non-trending phases of markets, it could be argued that Moving Average Envelopes would make great overbought and oversold indicators.
When stock prices are done resting and consolidating, they breakout, in one direction or the other. Hence:
An illustration of an upward price breakout is shown above on the chart of the QQQQ's. On the right side, the QQQQ's gapped up above the 2% price band.
A new trend in price is usually indicated by a price breakout as outlined above with a continued price close above the upper band, for an upward price trend. A continued price close below the lower band might indicate a new downward price trend.
In the chart of the QQQQ's, after the price breakeout, the closing price continued to close above the upper band; this is a good example of how a price trend begins. Soon after, the price will fall back into the Moving Average Envelopes, but the Moving Average Envelopes will be heading in a positive direction – easily identifying the recent trend as up.