One of my favourite TA tools is called the Squeeze indicator. I first came across the squeeze on the TradeTheMarkets website. The guys that run TTM, John Carter and Hubert Senters are both great believers in the squeeze. And there is no doubt in my mind that it is a pretty powerful tool.
The squeeze indicator combines three common TA methods into a single indicator.
The concept is simple.
Markets go through period's of consolidation before they breakout.When they break out they either break to the long side or the short side. The squeeze uses Bollinger Bands and Keltner Channels to identify these periods of consolidation. When this period of consolidation is over, a momentum indicator is used to indicate the direction that the market is likely to move in.
The graph below shows a custom AmiBroker Squeeze indicator which I've annotated to show the phases of the squeeze. The red square highlights the period of consolidation (indicated by red dots) - during this time the market is consolidating. When the green dot is printed, the squeeze is said to have 'fired' - What this means is that the Bollinger Bands having spent a period of time 'inside' the Keltner channels have now expanded, signifying increased volatility and therefore potentially price action. The momentum histogram on the Squeeze indicator shows Blue - meaning the market is bullish. You can see from the corresponding increase in price, that this Squeeze signal highlighted a successful bullish move.
