Looking for a volatility squeeze trade? Check out this squeeze on Guidewire Software (GWRE). (October 10, 2017)


Let’s look at Guidewire Software ( NYSE:GWRE ) here. Guess what business this company is in? That’s right, it is the software business, Guidewire Software ( NYSE:GWRE ), for the insurance industry. Underwriting, claims management, stuff like that. They run the software that when you are in an auto accident it always seems to find you at fault even if somebody else ran into you while looking at their iPhone. But then, let’s not talk about my recent experience. Instead let’s talk about the EPS rating on this, 93 percent on IBDs priority system. What this means is, that respect to momentum and consistency, Guidewire ( NYSE:GWRE ) is really a top-tier company, which is why you are seeing the stock run from $50.00 up to 80.00 basically over this last year.

So what are we looking at now? I am looking at a volatility squeeze here. Look at this volume, this is very, very conspicuous volume here. Almost twice normal volume. It closed in about the middle of the range, but this poked it’s head out the upper Bollinger Band for a brief moment today. But it also did it from Bollinger Bands that are only about 3 percent wide. And that is 3 percent of what? Of whatever the 20-day moving average is. So they are basically really, really tight together. They don’t get this tight, not on this stock, so this is ripe for a breakout. If it does break out here and close above the upper band, right now the upper Bollinger Band value is 78.92. So what I am going to do here is, I am going to set an alert for 79.50. If my alert gets triggered this is a stock that I am going to want to buy it. Then as soon as I buy it I will be keeping a stop right down here, maybe even back in the middle of the range here.

The idea is, you want to catch a stock that is breaking out from a volatility squeeze, you want to catch it as early as possible so that you can then put a stop as close as possible to where you are buying it; the location of that stop is right about in the middle of the range. Meaning the only way you would get stopped out is if the stock fell back to the middle of the range. And the only reason the stock would fall back to the middle of the range would be because the breakout was a fakeout, it was a false breakout, it didn’t work.

So that is the whole idea, you want to have a stop right at the highest point, at which we could say, “Okay, well this trade isn’t working. It is not doing what I wanted to do. I am closing the trade down.” Boom! And you are out. That is what we can do when we are buying from a squeeze above the upper Bollinger Band on a breakout, and then a stop that is pretty close here. Anyway, try this trade. Check it out. If it works my bet is it is going to. We don’t know if it is going to be tomorrow or the next day or whatever, but earnings aren’t an issue, not for a while now. I think you are going to make money on this trade.

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