The classic volatility squeeze is characterized by a period of narrow price compression and very low volatility that resolves itself by a period of high volatility. It can be a potentially profitable trading set-up for those alert enough to spot it, and nimble enough to take advantage of the opportunity.
One way of spotting a "squeeze" scenario is to identify a stock whose Bollinger bands, a measure of standard deviation around a moving average, have moved inside the Keltner channel, a measure of standard deviation around the Average True Range indicator. The next components of the strategy are to outline levels of support and resistance, be aware of the technical indications on the chart, and then be prepared to trade the breakout or breakdown.
Here are four stocks that fit the formula and are setting up for potentially powerful profits.
American Water Works (AWK) provides water and waste-water services to customers in the U.S. and Canada.
The stock has come off its June high and retraced about half of its 2016 gain. In the process it formed a triangle pattern above horizontal resistance in the $70 area. The price has compressed in a narrowing range as it has approached the apex of the triangle. The Bollinger bands (green) have moved inside the borders of the Keltner channel (red). The stochastic oscillator is crossing above its center line, and moving average convergence/divergence is tracking higher, both signs of underlying improvement in positive price momentum. Chaikin money flow moved into positive territory this month, and the accumulation/distribution line is above its signal average.
The stock looks like it wants to break out. It is a long candidate after the triangle downtrend line is penetrated, using a trailing percentage stop. The understanding is that the strategy behind the squeeze play is to take a quick profit or loss.