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Copyright 2005 by James D. Dean, All Rights Reserved
The question has come up many times: how to find a breakout from a Bollinger-Band "squeeze". This article provides a fairly good solution to that.
Here is the formula for the 20-day Standard Deviation of the Close, which is the basis for the Bollinger Band:
20-day StdDev = width of 20,10BB =
Sqr( 1/19 * ( -20*AvgC20*AvgC20 +C0*C0 +C1*C1 +C2*C2 +C3*C3 +C4*C4 +C5*C5 +C6*C6 +C7*C7 +C8*C8 +C9*C9 +C10*C10 +C11*C11 +C12*C12 +C13*C13 +C14*C14 +C15*C15 +C16*C16 +C17*C17 +C18*C18 +C19*C19 ))
For example, the upper band of a 20,20BB is a 20-day Simple MA plus 2 times the above formula, and the lower band is the 20SMA minus 2 times the formula above.
A "squeeze" occurs when the Bollinger Bands get RELATIVELY tight ... that is, when the width of the BB's is SMALL, versus what it has been over some arbitrary period of time. John Bollinger suggests comparing it to the minimum BB width over the last six months ... but TC's PCF language does not allow Min(formula) in its PCF's.
So, after a lot of experimentation, I determined that a so-so good substitute was to plot the Width of the BB's as a custom indicator (using the formula above), then apply a 60-day Simple MA Child indicator to it on the chart, and use Comparative SortBy to find cases where the Width formula plot is LESS than that moving average.
However, a much BETTER substitution is to plot a 60,20BB Child indicator on the Width formula plot. Now do a SortBy on that BB child indicator. Any time the value is close to or less than -100, it means the Width is currently less than ~90-95% of the Widths over the the last 60 days has been. In my mind, this is a legit "squeeze". Of course you could adjust the 60 days to something different, or change the 20-width of the Child BB to, say, 10-width, if you wanted a cutoff of ~55-65% instead.
Of course, the REASON for doing all this is to identify when a BREAKOUT EXPANSION FROM THE SQUEEZE has occured. You can do this in a two step process.
1) Find stocks that were IN a BB squeeze condition Yesterday:
a. Plot the 20-day StdDev anchored to One Day Ago as a Custom indicator in the bottom pane:
Sqr( 1/19 * ( -20*AvgC20.1*AvgC20.1 +C1*C1 +C2*C2 +C3*C3 +C4*C4 +C5*C5 +C6*C6 +C7*C7 +C8*C8 +C9*C9 +C10*C10 +C11*C11 +C12*C12 +C13*C13 +C14*C14 +C15*C15 +C16*C16 +C17*C17 +C18*C18 +C19*C19 +C20*C20 ))
b. apply a 20,20BB Child indicator to that custom indicator
c. bring up your desired WatchList, and SortBy the BB
d. Flag all stocks that have values near or below -100.
2) Now find which of those stocks have broken out of the Squeeze today. This can be done in either or both of two ways.
a. you can look for stocks whose Low today is above the Upper 20,20BB by using the formula (True = breakout):
L > AvgC20 + 2*Sqr( 1/19 * ( -20*AvgC20*AvgC20 +C0*C0 +C1*C1 +C2*C2 +C3*C3 +C4*C4 +C5*C5 +C6*C6 +C7*C7 +C8*C8 +C9*C9 +C10*C10 +C11*C11 +C12*C12 +C13*C13 +C14*C14 +C15*C15 +C16*C16 +C17*C17 +C18*C18 +C19*C19 ))
b. you can look for stocks whose BB width today is significantly greater than its width yesterday (ie. a "BB expansion" - this PCF expresses that comparison as a ratio - values greater than 1.25-1.5 or so are usually meaningful:
Sqr( 1/19 * ( -20*AvgC20*AvgC20 +C0*C0 +C1*C1 +C2*C2 +C3*C3 +C4*C4 +C5*C5 +C6*C6 +C7*C7 +C8*C8 +C9*C9 +C10*C10 +C11*C11 +C12*C12 +C13*C13 +C14*C14 +C15*C15 +C16*C16 +C17*C17 +C18*C18 +C19*C19 )) /
Sqr( 1/19 * ( -20*AvgC20.1*AvgC20.1 +C1*C1 +C2*C2 +C3*C3 +C4*C4 +C5*C5 +C6*C6 +C7*C7 +C8*C8 +C9*C9 +C10*C10 +C11*C11 +C12*C12 +C13*C13 +C14*C14 +C15*C15 +C16*C16 +C17*C17 +C18*C18 +C19*C19 +C20*C20 ))
Apply either or both PCF's in step 2 to the Flagged symbols in step one. Then VISUALLY EXAMINE the chart of the price with a 20,20BB child around it to confirm.
And watch out for head-fakes! Some stocks have a tendency to breakout in one direction, then on the next day REVERSE and head dramatically off in the other direction. So, I'd suggest you use the procedure above to create a "candidates" WL, but watch the price action one more day before committing to the trade.
Jim Dean
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