by Chris Becker
As I type this I’m looking over to my bank of monitors to watch the 5 minute chart on the SPI200 futures. Apart from a sharp open and the inevitable reversal on the job releases it has been a quiet day. Switching to other timeframes the same can be said for the ASX200 as a rule. As they say in the movies…a little too quiet!
Its the old Minsky chestnut – sustained periods of low volatility (either price rises or falls) – usually beget a short sharp period of high volatility.
There’s more than one way to measure market volatility, although the VIX is a good one. Here’s the XVI (ASX200) put through my own system:
And the CBOE VIX:
A different measure is average true range or ATR. What is it? True range is measured usually on a daily basis (but can be done down to minute charts) and is the greatest of the following:
- current high less the current low.
- the absolute value of the current high less the previous close.
- the absolute value of the current low less the previous close.
The average true range is a moving average of above. A rising ATR usually indicates quite strong movement, a falling ATR a benign period. Here is the ASX200 with a 20 day ATR:
The falling ATR is a concern (from a long point of view) and indicates an increased chance of a reversal down to support at 5350 points or so.
Keep an eye on volatility – contrary to popular belief, it is not something to be fearful of, but to embrace – as it provides the opportunity!