Sunday, December 04, 2005

Does Volatility Matter?

Here I replicated yesterday's study, but used six-day volatility (the sum of each day's range, with range stated as a % of index value) instead of breadth as the predictor variable. Volatility for the most recent six-day period has been below average (4.51 vs. 5.77).

When volatility during a flat six day period (N = 26) has been below 5.0 (N = 10), the market has been up 8 times, down 2 for a gain over the next six days of .80%. When the volatility has been above 5.0 (N=16), the market has been up 8 times, down 8 for an average loss of -.38%. Once again, this is a modest positive for the current market.

The larger issue here is whether many of the technical indicators might be more predictive during flat markets than during trending ones, given their strong overlap with price in strong and weak markets. I will tackle this issue later today in the Weblog and in a Trading Markets article early this week. Much more research needs to be done over different time frames with different measures. I suspect, however, that there's something here...