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CATEGORY Technical analysis

Technical Analysis 101: Know the Bollinger Squeeze

March 05, 2017

It doesn’t matter how well technical analysis works.

You’ll always find folks that laugh at the idea that drawing lines on charts, studying patterns, and identifying historical moves will make them any money. Warren Buffett, Peter Lynch, and Benjamin Graham won’t even look at a chart these days, for example. Instead, they focus solely on fundamentals to argue for bigger moves.

Who are we to argue with them?

They’ve made a fortune just with fundamental analysis.

However, the truth remains that technical analysis still works quite well. We’ve already talked about Bollinger Bands, MACD, DMI, RSI, Williams’ %R, and Money Flow. Once each confirms the other, we can tell with up to 80% accuracy when a stock is likely to pivot for a near-term gain.

We can add another one, though, called the Bollinger Squeeze.

A squeeze describes a narrowing trading range within the Bands and often shows up right before a stock breakout to the downside or the upside. In fact, John Bollinger argues that periods of low volatility can be followed by periods of higher volatility, leading to a potential breakout from consolidation.

When you spot the squeeze, we have to remember to confirm what we’re seeing with our other indicators mentioned above. One way to confirm what the squeeze is saying is by looking for historical six-month lows on the width of the Bollinger Bands. As the squeeze gets tighter, the width will eventually spike, telling us the trade in question is about to breakout in one direction.

To implement, look for a stock with narrowing Bollinger Bands and low Bollinger Band Width ideally near the low end of a six-month range.


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