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 - Get Report) 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.

Shares of the athletic apparel company Lululemon Athletica (LULU - Get Report) gapped lower in September and dropped down into a narrow horizontal trading channel range. The Bollinger bands have entered inside the Keltner channel but they are not pictured on the chart.

Moving average convergence/divergence and the relative strength index have been trending higher in bullish divergence to the sideway price action. Chaikin money flow has also been tracking higher and is entering positive territory, while the money flow index, a volume-weighted relative strength measure, is above its center line.

The technical indications are improving, but price action determines the trade. The stock is a long candidate after a breakout above channel resistance or a short-sale candidate after a breakdown below channel support. Either case requires a tight trailing stop.

Vista Outdoors (VSTO - Get Report)  designs and manufactures outdoor sports and recreation products.

The stock has followed a similar pattern to others in the squeeze group: first a sharp drop in price, followed by consolidation. The stock has been trading in a horizontal channel for nearly four months. This months it has moved above its 50-day moving average and is retesting pattern resistance.

Daily moving average convergence/divergence is overlaid on a weekly histogram of the oscillator and is moving above its center line on both time frames. This is an indication of an improving short-term trend and price momentum. Chaikin money flow is below its center line but above its 21-period average, and the money flow index is above its average and center line.

The stock is a long candidate at its current level using a close trailing percentage stop.

BorgWarner (BWA - Get Report)  manufactures components for drive train systems in cars and trucks.

Shares of this stock rose in July after making what could be a wide double bottom this year. They have also been trading in a sideways channel for the last four months. The Bollinger bands have moved inside the Keltner channel, but they have been omitted from the chart. The 50-day moving average made a golden cross above the 200-day average in September and the stock is currently retesting the upper end of the channel pattern.

The price momentum indicators are relatively flat, but the accumulation/distribution line is tracking higher and above its signal average, and Chaikin money flow is in positive territory.

The stock is a long candidate after a break above resistance, using a tight trailing stop with the idea of taking a quick profit or loss.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.