Volatility Analysis

Discussion in 'Technical Analysis' started by duard, Jun 16, 2005.

  1. duard


    Food for thought:
    From "Sentimentrader.com"

    Bollinger Bands are a very popular indicator, available on most quote packages. It puts “bands” around a stock or index which are usually 2 standard deviations from the 20-day moving average (those are usually the default settings - you can change them to whatever you wish). The Bands give you a good, quick look at how volatile a stock or index has been. Using those parameters on the S&P, there is a difference of only 22 points between the upper and lower Bands – a sign that volatility (on a closing basis) has been very, very low. So low, in fact, that we haven’t seen the Bands this tight in nearly 10 years. We’ve been conditioned to think that periods of low volatility lead to periods of high volatility. What’s interesting, though, is that there have been 354 other days in the history of the S&P 500 when the Bands have been extremely tight. Over the next 20 trading days, the S&P saw a one-day move of 1% or more (up or down) on average only 1 time. During any other random period, we would expect about 4 days with 1% moves in any given 20-day period. Traders are becoming very anxious to jump on the next prevalent trend, suggesting a sharp move could be in the works, but this history with the Bollinger Bands tells us that we may be in for more days with relatively small daily changes.
  2. duard


    Anybody else have volatility data on the stock index futures?

    That is data sorted by % moves, average true range, points per period, etc.

    Good Luck
  3. I think it may be prudent to compare apples to apples. Meaning, if we are looking at standard deviation data to measure current volatility levels we have to also define the next move with the same measurements.

    A larger move will follow the smaller move but it may not be what we are looking for in terms of a % move in the sp. Look at the volatility in March and April, this is the small cycle we are in now.

    It is interesting that volatility is at decade lows. The markets will become popular again when real estate cools off.
  4. I agree. People ask about the next bubble and where it will be. Looks like the stock market is the only place for the money to go.

  5. jrkob


    Very interesting. Thanks a lot for sharing this article.
    What it seems to say is that low volatility brings more low volatility, is my reading correct ?