Squeeze: tight range, building momentum

The idea

Volatility moves in cycles. Quiet stretches, when the range tightens and bars get small, tend to come before bigger moves. A squeeze is that quiet stretch, measured. The trade is to be positioned as it ends, in the direction momentum is already building.

What I look for

• A tight pattern: an inside bar (today's range inside yesterday's) or a run of small bars.
• The prior close above the 8 EMA.
• Momentum rising on both the weekly and daily charts.
• Volume coming in. Without it the squeeze can drift instead of fire.

The trade

• Entry: on the break of the tight range in the direction of momentum.
• Stop: the low of the entry day.
• Structure: shares, or a call debit spread to define risk. With a spread the most you can lose is what you paid, and profit is capped at the short strike. The spread doesn't need the stock to reach the short strike to make most of its value.

Example

FCX, October 12: an inside bar off a tight squeeze, with momentum rising on the weekly and daily. Taken as a 75/80 call debit spread, with the stop at the day's low.