CAC40: squeeze the entrance

Watch over the CAC40 this week! Indeed, the index shows the first signs of a squeeze… What does this training correspond to? How dangerous is it? Gilles Leclerc explains everything!

This week the situation is getting worse: the CAC40 has entered a so-called squeeze – a signal that the followers of the Bollinger Bands know about. If you are not used to this type of configuration, I will summarize the main aspects …

what’s a squeeze ?

A squeeze indicates that volatility has fallen to a minimum. The reasons for this decline in volatility can vary, but it generally occurs when the market is waiting for important news that it knows will have a major impact on prices. Or (and these are the most dangerous) when, for one reason or another, buyers and sellers have opposite opinions – and therefore strategies -. Then they face off in a kind of showdown until one side gives up and the winner can regain control. In that case, we generally see high trading volumes during the “arm wrestling”. Which at the moment it is not (on the contrary).

The preferred hypothesis is therefore that at this moment the operators are in a waiting position. Waiting for what? Difficult to say. Undoubtedly news (or hopes) coming from the Ukrainian conflict? But more likely (IMHO) because next week the first quarter 2022 earnings releases will start rolling out in the United States. With in the front line the sides that will open the ball.

And this is where it gets complicated …

The results are likely to be good or even better than expected. On the other hand, as with any publication of results, leaders must disclose their predictions for the rest of the year.

Here’s the problem: The trio of runaway inflation, Fed monetary tightening and rate hikes (to name a few) form a frankly bitter-tasting cocktail. It will be necessary to see how the market reacts. I wish good luck to the leaders who will have to lend themselves to this exercise. But it can be difficult to maintain a blissful optimism under these conditions.

Anyway, let’s go back to our squeeze and the commercial implications that this entails.

Be careful, the squeeze it’s a complicated setup

Another principle familiar to Bollinger enthusiasts: low volatility generates high volatility and high volatility generates low volatility.

Clearly and decoded, this means that after an acceleration (high volatility), the market calms down, goes through a phase of less volatility. When the market is calm (low volatility), right before expectations on publications or news likely to change that, you shouldn’t trust, it’s kind of a calm before the wind starts blowing again (and usually quite strong).

Another consequence: when volatility decreases, the impulsive waves – up or down – are of low amplitude. One thing to remember when detecting a squeeze : technical indicators become practically useless, even dangerous to use. The “ripples” inside the squeeze are likely to reverse a hit up, a hit down as prices linger squeeze.

Last thing: squeeze they are extremely complicated. They often attempt a false exit by tickling a Bollinger band, before turning to accelerate in the opposite direction and accelerate on the opposite side.

Morality: never try to anticipate the direction of a’s exit squeeze. Timing (as market participants do). Wait for the publication of the long-awaited “news”. And follow the direction the market decides to take. Get ready for acceleration. Place a stop on the other side of the volatility band squeeze. And cross your fingers.

I have a little (a lot and intentionally) simplified some rules and aspects of the formations in squeezebut in summary you get the idea of ​​what a squeeze.

And the CAC, in all of this?

Now, to stay consistent with the weekly points from the past few weeks, I’m offering you a 2 hour view update.

The volatility bands are the shaded envelope. These are the Bollinger Bands 100 periods, standard deviation 2. Why take 100 periods (instead of the 20 periods usually used)? Because by taking 100 periods on a 2-hour view, you can immediately see the volatility limits, i.e. the price limits in which prices can move on a day view (5 X 20 = 100).

And the squeeze in all this?

A squeeze appears when volatility falls below the lowest levels observed in 150 periods. They appear automatically on my charts: they are the little red indicators that have just activated around the volatility bands. They just appeared (small yellow dots), so the squeeze it is probable and attention, as you have understood, risks “oscillating” in the days to come, without it being possible to know exactly in which direction.

That said, since a trading position needs to be held, I will simply stay on those of last week.

As a reminder :

  • “In short, in the short term, the conclusions of last week are confirmed and remain for the moment identical to those of the previous week (resistance zone 6,800 / 6,850 points, as long as the 6,400 points zone holds up, no alert at the moment). “

Relationship in the aftermath : among other things, in the following days, the CAC reached a maximum of 6,829 points (see orange arrow on my graph).

  • “As long as we remain between these two limits, the CAC will not be able to set a real trend except on short-time units. “

The CAC got close to 6,400 as of last night’s close. This will be the level to follow in the hours to come.

Looking forward to the first publications from the banks next week and as long as we stay in this squeezeI will carefully avoid taking on additional positions.

May the force be with you,

Have a nice weekend,

Gilles,

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