Trading Tips

Volatility Changes Across Markets

A recent blog post got me thinking about where volatility stands now compared to where it’s been. Here’s what I found for stocks and the dollar. Both of the charts below is a weekly which includes two measures for viewing volatility. Normalized Average True Range (N-ATR) measures average period high/low ranges (You can find articles I’ve written about N-ATR at Trade2Win and TASC). The Band Width Indicator (BWI) measures the distance between the Bollinger Bands, which is standard deviation of closing prices.

Dollar Index
Here we see that while volatility has certainly fallen well off from where it was during the worst of the financial crisis, it hasn’t quite got back down to average levels from before then. It’s worth noting, though, that volatility heading into the start of the problems in 2007 was ridiculously low. I don’t expect to see it get back to those kinds of levels.

S&P 500 Index
Volatility in the stock market, however, has now fallen back to about the same levels it was at during the middle of the last decade. This is something very important to keep note of because N-ATR tends to be low turning sustained uptrends, but rise into market tops.

Trading Tips

Watching for a Market Explosion or Implosion

I’ve written on several occasions, including my first ever article published in Stocks & Commodities, on the subject of using Bollinger Bands in regards to identifying trends, especially the early stages of them. Basically, I use the Bands to look for situations where a market is ready to make a big move. In reviewing the charts this morning I noticed just that sort of situation in the stock market. Check it out.


Notice how tight the Bands have gotten thanks to the relatively narrow range the market has been in the last few weeks. The BWI indicator at the bottom of the chart (Band Width Indicator) says they Bands are about 2.8% wide relative to the 20-day moving average. That’s the lowest BWI reading in a while. The Volatility Reference Indicator (my own creation) tells us where the current Band Width is in relation to its extreme readings for the last year. It’s at 0, meaning the Bands right now are the narrowest they’ve been in at least a year.

All this means we should be looking for something big to happen. The narrower the Bands get, the more explosive is the move which follows them. If stock volatility expands rapidly (which is what an expansion in the Bands from the current narrow reading would mean), you can be sure similar types of action would be going on in the dollar, bonds, and commodities.

Alas, the Bands won’t tell us which way the eventual volatility expansion will take the market. Other tools are required there.