Spotting the Low-Volatility Breakout

I hate Steven Spielberg! I've gotten hooked on his Taken miniseries on the Sci-Fi channel, and it's keeping me up way too late. No, not because I'm scared of little green men with big eyeballs but because it's not over until 11 p.m. (which, on the Left Coast, is just seven and a half hours before the opening bell).

In Taken, the child, half-alien and half-human, has the ability to read minds. That kid would make a great trader. Think about it: If you knew everybody's thoughts, you'd never have to look at another 10-Q. No more cheesy conference calls, no more fundamental research. Forget about the company altogether; just trade against other stock traders.

Therein lies the real objective of technical analysis: Figure out what others are thinking and doing, and then trade accordingly. Nowhere is this more important than when volatility is low and you're expecting a large-range breakout. You can detect low volatility by measuring Bollinger Band width and use other indicators to read the market's mind. Are buyers quietly buying, or are sellers just gradually selling? Figure this out and you'll get a preview of coming attractions. By being ahead of the crowd, you can capture a much larger portion of the move.

Let's put this into practice with Renaissance Learning (RLRN - commentary - Cramer's Take), Molex (MOLX - commentary - Cramer's Take), Borland Software (BORL - commentary - Cramer's Take), the iShares Dow Jones U.S. Utilities Sector Index (IDU - commentary - Cramer's Take) and the iShares Dow Jones U.S. Energy Sector Index (IYE - commentary - Cramer's Take).

Renaissance Learning

Renaissance Learning is a textbook Bollinger Band squeeze. Volatility is cyclical -- that's the nature of the beast. So this low volatility leads to high volatility. But which direction will the volatility run? Up or down? With a bearish money flow, Relative Strength Index and price in the lower half of the Bollinger Bands, all signals are bearish.

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Dan Fitzpatrick is an independent trader in stocks and options, and is a member of the Market Technicians Association. His columns focus on quantitative strategies for trading and investing. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to [e-mail].