Saturday, January 12, 2008

Volatility Has Become More Volatile

The above chart (click for greater detail) looks at the 20-day moving average of the high-low daily trading range of the S&P 500 Index (SPY). Note how we saw a breakout in volatility in August, signifying a shift in the volatility regime. We're now seeing wider swings in volatility--in other words, volatility is itself getting more volatile. That is creating shifting market trading conditions and considerable choppiness to the trade, where moves can extend farther than expected--and then retrace more than expected.

I'm finding the volatility of the NYSE TICK--the number of extreme readings during the day--to be an excellent proxy for gauging the day's price volatility. I'll write more on this topic shortly.

In the interim, note that we're seeing a kind of wedge pattern in the volatility measure: lower highs and higher lows. I would expect a resolution of this pattern to the upside to correspond to a nasty market downdraft; for that reason, I'm monitoring the daily ebb-and-flow of volatility closely.

BTW, here's an oldie but goodie post of mine on a very worthwhile topic that I need to follow up on.


When the VIX Becomes Volatile

VIX and Daytrading Opportunity