The bullish squeeze alert pattern

The bullish squeeze alert pattern is one of my very favorite bullish patterns. It's a versatile three-stick pattern, and it pops up on a relatively frequent basis, meaning that the opportunities to trade it are more common than some of the other patterns I discuss.

Spotting the bullish squeeze alert pattern

The rules that govern the formation of a bullish squeeze alert allow for a little wiggle room. The strictest rule is that the first day of the pattern must be a down day. After that, the second day has to be an inside day of the first and the third an inside day of the second. Beyond that, though, the rules are kind of flexible. The second and third days can be up days, down days, or a combination of the two. The only strict criteria governing the second and third days are that they must be inside days, and they have to form a triangle.

Figure 9-16 shows a variation of the bullish squeeze alert that includes black candles for the second and third days.

Figure 9-16:

A bullish squeeze alert pattern with black candles on the second and third days.

MER I love this pattern's versatility, and it owes that attractive trait to the presence of a triangle. Regardless of how they're formed, I've found that triangles usually lead to some volatile moves. Keep on the lookout for triangles as you scan your candlestick charts. A triangle formed on a chart shows that prices are coiling together and will soon be ready to spring in one direction or the other.

Executing trades with the bullish squeeze alert

You can see the bullish squeeze alert at its bullish best in Figure 9-17. It's a chart of Southern Company (SO), which is a power company or utility that serves customers in Alabama, Florida, Georgia, and Mississippi.

Utility stocks aren't the most exciting stocks to trade, but the advantage is that you generally won't rack up massive losses on a trade in this sector that doesn't work out.

The pattern appears during a downtrend, and the first day is a long black candle. The second day is an up day, but also an inside day relative to the first day. The final day is a down day, but according to the rules, it's also an inside day relative to the second day. I chose this chart to show that the second and third days don't have to be specifically down or up, but do have to be days that are inside days of the preceding day.

The pattern forms a triangle, which means you can expect quick price moves in either direction. Because of this high level of volatility, I like to use the low of the pattern's first day as my sell stop. That gives the security the opportunity to move without being stopped out just before a move in the right direction. This pattern is followed by some lower trading, but then the stock takes off like it should.

Figure 9-16:

A bullish squeeze alert pattern with black candles on the second and third days.

The bullish squeeze alert failing to bring on higher prices

If you want to see a bullish squeeze alert pattern in a failure situation, look no farther than Figure 9-18. The figure features a chart of Target (TGT) stock. The days go like this:

1. The first day of the pattern is a very long black candle.

2. The second day is a very encouraging (for the bulls) white candle, which is an inside day relative to the first day.

3. Finally, the pattern is capped off with a down day, but it's an inside day relative to the second day, so the pattern is complete.

Figure 9-17:

The bullish squeeze alert pattern performs well on a chart of SO.

Figure 9-17:

The bullish squeeze alert pattern performs well on a chart of SO.

The Bullish Squeeze Alert Pattern

Figure 9-18:

A bullish squeeze alert pattern fails on a chart of Target stock.

Figure 9-18:

A bullish squeeze alert pattern fails on a chart of Target stock.

Squeeze Pattern

The stock shows lackluster trading for a few days after the pattern appears, and although the high of the pattern's third day isn't violated, the lack of uptrending action may indicate that the pattern is a dud. There's no real need to wait around for lower prices to get out; it's probably best just to exit and move on, or if you wait on confirmation, just bag the idea of a trade and start looking elsewhere. You should try to be liberal with your stops on the bullish squeeze alert, but sometimes it's best to also require some confirmation that the squeeze is going in the desired direction a couple of days after the pattern appears. If it's not, feel free to stop waiting around and go on to your next trade.

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