As you know, when short-term volatility is one half or less than its normalized longer-term volatility, it signifies a pending large market move. When the short-term reading reaches an extremely low level the move is likely to be even larger and more eminent.
A good example occurred today in the T-bond market. As you can see from the chart below, not only was the six-day volatility in bonds less than 30% of the 100-day volatility (an extremely low level), but it also was the lowest six-day reading for the life of the contract. Such extreme readings are fairly rare, but when they do occur the moves–at least on an intraday basis–tend to be large, as was the case today).
|Figure 1. September 99 T-bonds (USU9), daily. Source: Omega Research.
One final note: I recently talked about combining trend in low-volatility situations. Todayâ€™s downward move in bonds was simply a continuation of its longer-term trend.