Volatility Runs In Cycles
Each evening we focus on the most interesting aspects for the upcoming trading day. The comments are based on observations of the nightly updates of the Futures and Market Bias pages. They are provided for educational purposes only and are not intended to be direct trading advice. Also, keep in mind that these remarks are made up to 12 hours in advance of the markets opening. Therefore, overnight events may alter the outcome of these observations.
At the time this is being published, the S&P Globex Futures are trading 1.40 points higher and the Bond Market Futures are unchanged.
Several of you have emailed me asking to explain further the low volatility situation that I discussed last week in the December Gold Futures [GCZ9>GCZ9]. Volatility tends to run in cycles. Lower-than-normal volatility tends to be followed by higher-than-normal volatility as volatility reverts to its mean. Normally, a large price break ensues as the low volatility reverts back to more normal levels. Like a spring being compressed, the longer the volatility stays low the bigger the move as volatility reverts to its mean. Looking to the gold chart, notice that the 6 day historical volatility reading dropped below 50% of its 100 day reading. In addition, it stayed there for quite some time (a). Notice that a large price move ensued (b) as volatility reverted back to more normal levels (c). Admittedly, this is an extreme example but as you can see large moves do often occur out of low volatility situations.
Tonight we have 4 indicators pointing higher on the Market Bias Page. Normally, I’d be bullish here but 3 of the signals are from Friday and today the stock market could not “hold†the overnight gains. Therefore, I’d remain cautious on the long side and possibly even look for shorting opportunities in the December Nasdaq 100 [NDZ9>NDZ9], S&P [SPZ9>SPZ9] and Dow Jones [DJZ9>DJZ9] index futures.
For you breakout players, or more appropriately breakdown players, November Orange Juice [OJX9>OJX9], mentioned last night, closed poorly today (a) and looks poised to challenge its recent lows. Look for a shorting opportunity here.
Volatility Watch
December Coffee [KCZ9>KCZ9] remains on all three Volatility Explosions Lists. Continue to watch for a larger-than-normal move (in either direction) as volatility reverts to its mean.
Best of luck with your trading on Tuesday!
Dave Landry
PS-Reminder: Protective stops on every trade!