I’m often referring to an indicator called the TTM Squeeze, created by John Carter and featured in his great book, Mastering the Trade. It’s been one of the few indicators I focus on besides price action and volume to catch larger than expected price moves. I’m a big believer on letting price action confirm your assumption on a trade but having a technical setup or system is a great way to filter out the noise as well. The squeeze is based on the idea that markets tend to compress or ‘squeeze’ in quiet ranges before they are ready to move or expand out of those ranges. As a directional trend trader its a great way to identify stocks that are preparing to make their next move on any timeframe. The markets spend a lot of time in trading ranges, building up energy for the next squeeze to release energy and shift from compression of price movement to expansion. If trading directionally its your job to identify those moments in time where a greater than expected move is likely.
What is the TTM Squeeze?
The squeeze is made up of a few different measures. First, it identifies when the Bollinger bands are trading inside of the Keltner Channels (or when they are in a squeeze) and then a momentum index oscillator shown by the histogram bars. If you aren’t aware of what these indicators are, the Bollinger bands are a type of envelope that is plotted at standard deviation levels above and below a moving average. This shows when volatility is quieter (bands contracting) and when volatility increases (bands expanding). Keltner Channels are based on a moving average and the average true range (ATR) of the stock or market. The Momentum index oscillator is used to estimate the direction, velocity, and turning points of market movements.
Now if we know we want to be aware of when the Bollinger bands go inside the Keltner Channels to indicate a trade setup, we can either look at the below chart with all these lines on the chart or we can save our eyes and use the Squeeze indicator. This is all much easier to understand visually below in the Squeeze. When red dots appear on the middle line plot, that means a squeeze has begun. Once the Bollinger Bands expand back out of the Keltner Channels, the squeeze turns from red dots to green and fires a signal based on the direction of the momentum histogram bars. In the AAPL daily chart below you can see the 3 examples of a long trade fired off when the squeeze triggered and led to substantial upside moves in the stock. The trade signal is valid until the stock loses momentum based on the histogram bars changing from light blue to dark blue.
AAPL daily chart showing Bollinger bands and Keltner Channels signifying a squeeze. Instead of plotting those indicators, you can use the Squeeze to make it visually more appealing.
What timeframes and stocks do squeezes work best on?
I have been using the squeeze for many years now to get ahead of big moves or at least be aware of potential big moves brewing. You can literally use it on anything from an intraday minute chart to a long term monthly chart. The signal tends to last for 6-10 bars once it confirms a breakout. So on a daily chart that can be 6-10 days, while on a monthly chart, 6-10 months. These are just averages but you never know how far or long a stock may rise or fall, that’s why following the momentum of the trend is so important in order to maximize the move. I prefer using this on liquid momentum stocks that trade active options. Also on futures and index etf’s that lead the overall market. Generally if there is a squeeze forming on an index you can drill down to a sector and specific stock that may be forming a squeeze as well. These moves can be that much more explosive. Lastly, the best squeezes tend to be in trending stocks that are above their key moving averages and sloping up. If there is little resistance above, it makes an explosive squeeze that much more likely to ignite to new highs.
Real world examples of Squeeze trade setups
Tesla (TSLA)- Tesla is a great example of a growth momentum stock with higher volatility that works very well for trading the squeeze. The whole idea of finding a time when a fast moving stock quiets down to rest and then catching the next impulse is the reason the Squeeze indicator is so valuable. You never know which squeeze is going to be the homerun play but identifying those potential moments in time is step one in the process to finding big winners, especially in growth stocks.
TSLA had a monster run in 2020 (which was triggered based on a monthly chart squeeze at the end of 2019) and the daily squeeze set up many times for large trade opportunities. As shown below the stock quieted down enough in mid May to form a squeeze that pushed to new highs, then again consolidated into a squeeze in August just before the news of a split came out. The stock ran up with positive momentum on the histogram and no closes below the 8 ema until after the split Sept 1st. You can see later in the year more “red dots” appeared on the squeeze indicator. One small rally before earnings were released, then a short side trigger that actually worked in October. Although I skip squeeze signals that go against the dominate trend on the daily chart. Then finally the biggest move of the year came when a squeeze was forming just before they announced TSLA would be included in the S&P 500 in November. The stock gapped up the next day above the 8/21 ema’s and never looked back into year end. First hitting the fib extension target at 550 and continuing up to make an eventual high near 900 as shown in the second chart. The hardest thing to do as a trader in this situation is staying in a winning trade but focusing on the price action instead of the P&L in your account is a good rule of thumb. As long as the stock continues above the 8 ema the short term momentum is strong enough to stay long. You can see in the second chart the stock eventually rolled back under the 8/21 EMA’s in early 2021 and actually fired off a squeeze to the downside which could have been shorted as it pulled all the way back to under 600.
TSLA daily chart during 2020 showing how a trader could have participated in one of the strongest rallies by a growth stock in years.
TSLA runup into year end 2020 fueled by a daily squeeze that coiled tight in November and the catalyst being S&P inclusion news.
Facebook (FB)- Facebook had a textbook squeeze set up on the weekly chart in early 2021 that chopped alot of traders up while it formed. Its important to note that while a squeeze is forming (red dots) its likely to be choppy and sideways so you don’t want to be involved until it starts to change from red momentum bars to yellow at least, then green when positive momentum takes over on the histogram. I often use the 8/21 EMA’s on the given timeframe to give me a level to potentially accumulate a starter position and then add to it when price breaks a key trendline or the squeeze fires off in that direction of trend.
You can see FB stock went from roughly 280 to 380 in 3 months time off this weekly chart signal. It wasn’t a straight up every week move like a higher momentum stock may have done but the trend was intact and closed above the 8 week EMA the entire time. A tip I use sometimes if I did not have a position initially is to wait for the first pullback to the 8 EMA after the squeeze has fired off its buy signal. Its often a great spot to buy a first retest as the stock is still emerging from its range. A stop below the 21 EMA is a likewise risk management tip in this scenario, as if price slips back under that level its likely a false signal.
FB weekly chart in 2021 fired off a large squeeze buy signal that saw the stock run up +35% in 3 months. This is the type of move that can see even long term call options rise 300-400% in value.
Beyond Meat (BYND)- Beyond Meat was a pretty hyped momentum stock with high short interest in 2019 after its IPO, it continues to see lots of up and downs into 2020. A specific setup I traded on it was in September 2020 when it formed a long squeeze as it consolidated between 125-135. As you can see the trendline break and squeeze firing off near the point of the arrow was a clean buy signal that saw a move from 135 to 190 in less than a month. Over a +40% rally. I mentioned earlier that these squeeze signals tend to last for 6-10 bars when they trigger but some can continue higher so I try to let the stock tell me when its running out of momentum. Can often target a previous high or mechanical % target on half the position and then let it run until it closes below the 8 EMA or something like a 2 bar trailing stop works just as well to manage things.
BYND squeeze buy signal in Sept 2020 led to a 40% rally in under a month.
Russell 2000 Small Cap ETF (IWM)- The Russell 2000 index monthly chart shows several examples of long term signals going back to the 2008 financial crisis. I thought it would be interesting to include a monthly timeframe chart and how the squeeze can help a trader avoid big downside moves if long. Likewise being able to pinpoint when a market is ready to start a multi year move higher.
Back in 2007-08 the IWM monthly chart started to roll over first before everything else and was already trading below its 21 month EMA (blue line) when 2008 began. A squeeze was forming on the monthly chart warning of a big move and as long as price stayed below the key 21 EMA it pointed towards selling momentum. Clearly that transpired as the markets got crushed into end of 2008 with the recession in full swing. The histogram bars turned from red to yellow around April 2009, showing a potential bottom and end to the bear market. Another monthly squeeze formed during 2012 which was a very quiet year in stocks. Quiet times often setup the next loud times. Markets don’t move because they want to, they move because they have to.
By early 2013 the IWM monthly squeeze breakout was triggering to highs and stock rose nearly every month that year. By 2015 another monthly squeeze was forming. A tricky long one that actually didn’t trigger until mid 2016 but once it did, led to nearly 2 years of upside rally in small caps as the IWM went from 120 to 170. Finally after some selling in late 2018 and a mostly quiet 2019, setting the stage for a potential loud 2020 and beyond. The monthly squeeze formed again and while the COVID crash in early 2020 created a bit a of a false downside move, once IWM closed back over its 21 EMA on this monthly chart it pointed towards large potential upside, which is what happened into early 2021.
IWM monthly chart showing long term trends over the years.
What about Bitcoin and Crypto markets?
Bitcoin - I like this example because you don’t even have to know anything about Bitcoin to have been involved in the trend that was so easy to see and the squeeze made it obvious when energy was building up for its next move. The Bitcoin chart below also shows how well the 8/21 EMA moving averages help you see when a trend is in place. You simply want to be long when price is trading above and cautious or even short when price breaks below.
Several daily squeezes setup on Bitcoin from late 2020 to early 2021 on its large rally from 10,000 up to 60,000. Buying or adding to a position each time a squeeze showed up was a valid trading strategy. Then using the ATR trailing stop (blue and pink dots) is a great way to manage risk if following trends. Seeing momentum slow and break down in April 2021 was a first signal that Bitcoin and the Crypto markets in general were perhaps due for a correction. Which came quickly before eventually bottoming out near 30k and forming a new squeeze signal, trading back above the 21 EMA and rallying back higher as of the current date in August 2021.
Bitcoin BTCUSD daily chart showing several squeeze signals on its epic rally to 60k.
Takeaways
The squeeze is a tool that a trader can use to find moments in time when a stock is resting before its next run. Using price action to confirm trigger points and proper risk management make this a great indicator for trend following traders.
We don’t ever know when a stock is going to make a larger than expected move but using the squeeze shows us when the potential volatility as measured by Bollinger bands gets ready to expand outside of its normal Average true range (ATR) as measured by the Keltner Channels.
Squeeze signals often trigger in the direction the stock came from, so its a continuation trade setup. The same concept as a bull flag consolidation in an uptrend is likely to continue higher. Things in motion tend to stay in motion after they take a break to rest.