Tuesday, September 14, 2010

Weekly Squeeze Setup

The above chart shows the 20 week, 2.0 SD Bollinger bands in cyan with the 20 week, 1.5 ATR Keltner channels in yellow. When the Bollinger bands contract inside the Keltner channels, the market is said to be in a squeeze as price volatility is less than the average range of price movement. Typically, when the Bollinger bands move back outside of the Keltner channels it signals the initiation of a strong trend.

I have compared two weekly squeeze setups on the chart, one from 2007 and the current one. The 2007 squeeze had a bullish resolution with a 9% gain before a sharp pullback. At that time the ADX was high with the DI+ > DI- indicating a strong positive trend. The lower Keltner channel was pointed up. Currently, we have the opposite situation, except for the ADX which is currently also high. The DI- > DI+ indicating a strong negative trend and the upper Keltner channel is pointing down.

This squeeze setup could resolve either way, but the coincident indicators suggest it will be to the downside. While we should be prepared for a pullback and another rally attempt, the market has become significantly overbought and it is possible that the current move will be enough to complete wave B or X. I would not be surprised to see a continued push into next Tuesday, 9/21. If that should be the case, I will have no problem taking another half short position with a 1.5 to 2 ATR stop in the Qs. If it turns out to be the top, I will add on the way down.

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