Here’s how you can trade Northrop Grumman with the Volatility Squeeze 1,2,3 method. (July 25, 2019)NOC
I want to look at Northrop Grumman ( NYSE: NOC ), actually, I don’t really care that it is Northrop Grumman ( NYSE: NOC ), I want to look at this chart. This was a textbook volatility squeeze here. A really, really nice volatility squeeze, close to the 50-day moving average, really close to the 50-day moving average.
Aerospace has generally been on fire, not like the strongest group in the market but certainly up there within the top, I would say 20 percent or so, enough to be an honor student; you could see how this was moving. The stock is trading right here and then, boom, earnings come out, a big breakout above the upper Bollinger Band on two standard deviations on huge volume.
We first get big volume here, a lot of buying, a lot of gyrating around but the stock closes higher. And then here, this is classic Phase 1 of a volatility squeeze methodology that I track. I won’t say I invented it because, frankly, to me, it is kind of common sense, let’s just say I never really read it in a book. But again, it’s common sense, so follow me on this. You’ve got the volatility squeeze to begin with and then the fist move out of a squeeze is what I call Phase 1. It is where buyers come in, they rush to buy the stock, they want to get as much as they can, right? Well, at some point that demand wears out.
There are some folks that are buying it here at 325.00, 330.00 maybe 335.00 but they are going like, “You know what? I am not going to buy it at 360.00, no thank you, but I will buy it here.” And so maybe, and I am thinking about institutions as well as lower dollar traders, I’ll say. They have a discipline, they buy to a certain point, maybe they get half of their allotment, I don’t know, we don’t know right now but we will know in a while because I will tell you what I am looking for. So as I see this I go, Okay, it’s like 2 million shares in a day, this is not the type of volume we typically see here on Northrop Grumman ( NYSE: NOC ) so this is institutional buying.
So as I am looking at this chart I am not going, Oh, I have got to buy this stock before it gets to $400.00. No, I am looking at this chart and the one thing that I am thinking about is, how much institutional demand is there for this stock? Because if there is a lot of institutional demand for the stock they will not have gotten all the shares that they want during this 2-day move, they just won’t. And so that’s my question, how much institutional demand is there? So as a trader this is what I am doing, and I can wear a few different hats here. If you are a momentum trader look to this stock, if it is trading above 355.00 tomorrow keep a reasonable stop on it and then ride this thing up another day.
For me, I would rather wait to see when Phase 2 starts. So we’ve got Phase 1 on the upside, Phase 2 will be a pullback; where the initial buying pressure wanes, it just kind of wears out, and then the stock falls because that’s what stocks do when they are not being bought aggressively. This is when I am looking to see if the stock holds at 330.00 or above, that tells me that institutions are definitely wanting this stock and then I want to be a part of it. Because the next move is Phase 3 up here. If it does not hold here but instead it just keeps going then I don’t want to be a part of this stock, because was kind of a last gasp and no institutions are really buying it.
So I am really looking at this stock as a higher-risk stock to trade right here. Because if I am just going by my thesis that I just mentioned I would really have to hold this stock about 8 percent on the downside before I would really get a sense of whether institutions are buying. That is why I would rather wait, I would rather see the stock, wherever it’s going to come down from, maybe it will be here, maybe it will be up here, I don’t know. But I am waiting for Phase 2. I want to see when the stock falls and then more importantly when it starts to rebound. And when it starts to rebound, now I am buying the stock and I am keeping a stop down here, 4.5 percent.
I would even probably keep it right about here, right about in the middle of the volatility squeeze cluster, right about 325.00. So I am buying the stock right about here, keeping a stop down there, 3.5 percent, that’s a much better trade, a higher probability trade than just grabbing the stock tomorrow because it’s up big on two successive days. Though again, this thing could run tomorrow. Don’t say, oh you are telling me not to buy the stock, Dan. No, I’m telling you that it’s a lower probability trade just because the higher a stock goes the riskier it becomes because of the danger of a big snap hook trade reversal.