Envelopes are lines placed at fixed percentages above and below a moving average line. Envelopes help determine when a market has traveled too far from its moving average and is overextended.
Source: Murphy, John. Technical Analysis of the Financial Markets; (c) 1999.
The following is an example of an envelope.
Source: Charts created using TradeStation. ©TradeStation Technologies, 2001-2009. All rights reserved. www.TradeStation.com
The following chart displays an envelope using a 20 day moving average.
Source: Charts created by Bloomberg LP. All rights reserved. Click here for more information on Bloomberg.