Squeeze Plays in Google (GOOG)

Apr 19, 2007: 9:44 PM CST

Rule Four of the Guiding Principles of Market Behavior states “Markets Alternate Between Expansion and Contraction”, meaning that there are a variety of trade ideas you can develop based on this principle.

A weekly chart of Google (GOOG) illustrates this concept very nicely, with “Squeeze Plays” that could be entered with the volatility contraction easily identified by “Bollinger Band Squeezes.” Remember, Bollinger Bands measure volatility and are standard deviation functions, and so when these bands greatly constrict around (flat) price movement, a breakout is often imminent (though it is often impossible to predict the direction of the expansion).

Allow me to illustrate the point with a weekly chart of Google:


I have annotated the “Squeeze” plays with arrows. Because the trend is up, one can assume the breakouts will occur to the upside, but it is best (from a probability standpoint) to wait until the break occurs and then enter with a tight stop (although entering before the break also provides for a tight stop, but lowered odds of success).

Also, the triangle consolidation provided a clear technical price pattern from which to base trade ideas and price assumptions, and required no indicators to identify.

Price breakouts – if your style is identifying them – provide little in the way of price targets, but do provide clear stops if the breakout fails. This is a key to the success of trend following, where many breakouts fail, but the profits from the ones that succeed far outweigh the small losses when they fail.

Trading breakouts from consolidation also provides an excellent means to play for a large price target, as moves out of equlibrium often tend to be strong and sustained.

Think of this concept when you analyze charts and you see strict volatility constriction – you can often expect a price expansion is nearby.

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