Monday, November 30, 2009

Weekly Stock Market Volatility Continues to Wane

How much price movement can we expect during a trading week? As we can see from the chart above, that measure of volatility has been dropping steadily through 2009. The red line shows the average weekly high-low range, expressed as a percent, over the past 10 weeks. That average range now stands at 3.4%, down from about 10% early in the year.

Adapting to this lower volatility has been one of the great challenges of trading during 2009. As I noted back in May, daily average ranges fell below 2%, down from 4.5%. That level is now about 1.23%.

How far is the market likely to move in your favor? How far should your stop points be set? When are moves ripe for reversal? Knowing how markets are behaving in their volatility is just as important as knowing their directional tendencies.


Brian said...

Reminds me of the Soros quote - Volatility peaks at turning points and diminishes as the trend becomes established.

Justin said...

Intraday high-low range has been deceiving though lately. Eventhough the high-low has been tighter lately, the swings within it have been wild. Would be interesting for someone to calculate the total "path traversed" for each day. A simple way to do this would be to sum up the high-low range of every 15-min bar. Would be very interesting to see how this aggregate 15-min number of recent compare to the similarly tight trading ranges of 2004-2006. Or even more interestingly, create a ratio of "path traversed" to the simple daily high-low range. I don't have access to intraday 15-min data or else I would have done this analysis long ago. I imagine if results are significant such that path traversed is extremely high vs. dayHI-dayLOW then there are very good options trades to be had on the SP by going long volatility (via straddles, etc) and flipping out of them during the wild intraday swings. My hypothesis is that the implied vol of SP options is underpriced at a VIX in the low 20's with intraday swings being significant