Thursday, December 24, 2009

Looking at the Correlation of Trend and Volatility

Note how volatility (average daily high/low range for SPY over a moving five-day period; red line above) has been coming down during the lead up to the holiday, as prices have been breaking out to the upside. Eventually, particularly with the holidays behind us, we will see a mean reversion in volatility and a pickup in market movement. I will be tracking the correlation between volatility and directionality moving forward, as this will provide us with insight as to whether we move back into the multiweek trading range vs. melt up to significant bull highs.

1 comment:

Matt Fahmie said...

Oh do I anticipate the day volatility returns to this market. The current environment has given me a renewed appreciation of the importance of volatility for my trading style. This has sparked to a renewed interest and immersion in all that is volatility and how I can measure and anticipate it into the future. Both on a macro and micro scale it is the lifeblood of my trading, so I must understand it like it is apart of me. It would be great if you could provide any further studies on this subject. Much appreciated.

-Matt Fahmie