You'd be hard-pressed to find a trader who has never heard of John Bollinger and his namesake bands. He calls it "the Squeeze. Here we look at the squeeze and how it can help you identify breakouts. While it can be a real challenge to forecast future prices and price cycles, volatility changes and cycles are relatively easy to identify.
This is because equities alternate between periods of low volatility, followed by periods of high volatility, and so on - much like the calm before the storm and the inevitable inactivity afterward. Bollinger suggests that, to determine breakout direction, it is necessary to look to other indicators for confirmation.
If there is a positive divergence - that is, if indicators are heading upward while price is heading down or neutral - it is a bullish sign. For further confirmation, look for volume to build on up days. On the other hand, if price is moving higher but the indicators are showing negative divergence, look for a downside breakout, especially if there have been increasing volume spikes on down days.
Another indication of breakout direction is the way the bands move on expansion. When a powerful trend is born, the resulting explosive volatility increase is often so great that the lower band will turn downward in an upside break, or the upper band will turn higher in a downside breakout.
Bandwidth reaches a minimum distance apart in May indicated by the blue arrow in window 2 , followed by an explosive breakout to the upside. Note the volume build that occurred beginning in mid-April through July. It is not unusual for a security to turn in one direction immediately after the squeeze, as if to trick traders into thinking the breakout will occur in that direction, only to reverse course and make the true and more significant move in the opposite direction.
Traders who act quickly on the breakout get caught offside, which can prove extremely costly if they do not use stop-losses. Those expecting the head fake can quickly cover their original position and enter a trade in the direction of the reversal. In Figure 2, Amazon. AMZN looked to be giving a squeeze set-up in early February There is negative divergence between the RSI line 1 of window I , the intraday intensity line 2 of window II , accumulation-distribution index line 3 or window II and price line 4 of window III - all of which point to a downward breakout.
Breaking above the day moving average the orange line in the lower volume window on drops in stock price, suggesting a build up in selling pressure, volume shows above normal values on downside price moves.
Finally, the long-term trend line is breached to the downside in the first week of February. A downside breakout would be confirmed by a penetration in the long-term support line line 5 of window III and a continued increase in volume on downside moves. The challenge lies in the fact that the stock had demonstrated a strong up trend, and one pillar of technical analysis is that the dominant trend will continue until an equal or greater force operates in the opposite direction.
This means that the stock could very well make a head fake down through the trend line and then immediately reverse and breakout to the upside.
It could also fake out to the upside and break down. While it looks set to breakout to the downside along with a trend reversal, one must await confirmation that a trend reversal has taken place and, in case there is a fake out, be ready to change trade direction at a moment's notice. By using non-collinear indicators, an investor or trader can determine in which direction the stock is most likely to move in the ensuing breakout.
With a little practice using your favorite charting program, you should find the squeeze a welcome addition to your bag of trading tricks. Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.
A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Here is the squeeze equation: Figure 1 — Weekly chart of KB Home showing the squeeze pattern setting up in the year leading up to May Chart provided by Metastock.
Figure 2 — A squeeze in the making. Here we see on the weekly chart of Chart provided by Metastock. A conflict of interest inherent in any relationship where one party is expected to act in another's best interests. Passive investing is an investment strategy that limits buying and selling actions. Passive investors will purchase investments How much a fixed asset is worth at the end of its lease, or at the end of its useful life.
If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded. No thanks, I prefer not making money.
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