Compression and expansion

What it means

Compression is a period where the range of recent bars has narrowed relative to what this instrument normally does. Expansion is the opposite, and it is only an expansion while it is still under way.

The comparison has to be self-referential. Bitcoin's quiet week and a utility stock's wild week can be the same percentage, so any threshold expressed as a fixed number is wrong for most markets.

How we detect it

The engine builds a bandwidth series — the distance between the upper and lower Bollinger band divided by the middle band — and needs at least sixty values of it before a percentile means anything.

The current bandwidth is then ranked within that history. In the narrowest fifth, the state is compressed. In the widest fifth AND higher than it was three bars ago, the state is expanding. Everything else is normal.

The still-widening condition is the interesting half. Sitting in the top fifth after a large move is the aftermath of an expansion rather than one, and reporting those two as the same state would describe a finished move as an unfolding one. A second, independent view — a fast ATR against a slow one — is reported alongside.

When the read carries information

• Sixty or more bandwidth values exist on the timeframe in question, which on a daily chart is roughly a quarter of trading.
• The instrument's regime has been broadly stable, so its own history is a fair yardstick for its present.
• The reader treats it as a statement about range rather than about direction — compression says nothing about which way a market leaves it.

When it misleads

• After a structural change in an instrument's volatility, the historical percentile compares the present against a market that no longer exists.
• A holiday period compresses bandwidth for reasons that have nothing to do with positioning, and the read cannot tell that from a genuine contraction.
• Compression can persist far longer than a reader expects. It is a description of now, and it contains no timing whatsoever.

How it reaches you

Our surfaces report the state and the percentile behind it, so a reader can see how narrow narrow was.

The popular framing of a squeeze is that something is about to happen. This publication does not make that claim: a compressed market is quiet, and quiet markets sometimes stay quiet.