The Squeeze, sometimes called a Slim Jim, is a pattern I and a couple other Spikers trade. The pattern indicates a decrease in volatility followed by a surge and a strong move. As volatility declines, the Bollinger Bands squeeze together indicating a period of base building. Then usually a news event or a buyer in size, will trigger volatility expansion and a wave of new buyers will plow into the stock. I use Bollinger Bands to find them, and look for circumstances similar to the one SPN is showing.
In mid-September, SPN announced good news
accompanied by a major spike on high volume. The spike closed far outside the bands, which indicated significant strength and the potential for more upside. Then it traded sideways for several days (make sure it’s at least 12 bars). As the bands come together, it had a little test of resistance at 27, then drifted back as the short-term indicators dropped into ST/OS area. A trader could have bought as the short-term indicators first dropped and anticipated the squeeze, or at the point of the false break (which I did and had to sit through the test of support again), or on the recent decline of the 2-day RSI below 30. The reality of these lateral squeeze patterns is that they usually set up in front of a news event, so picking direction can be a gamble (I won’t trade them into an earning announcement.)
Another
strategy is to buy an option straddle as volatility drops and wait for the move (I met a guy that had made a fortune doing this on S&P squeezes during the 1990s). I usually take a position in the direction of the initial spike and trend and keep a tight stop on it. If you get stopped out, pay attention and look for a second entry.
A couple of other comments–if you find a squeeze setting up around a trending 20-day EMA take a position early and let the Squeeze set up. At other times, they will set up in the last gasp of a move, so be careful. Sometimes they form right after a top or bottom completes, and initiate a new trend. I also look for them on the weekly charts and trade the subsequent move off the daily charts.