Volatility on snooze

snooze

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!

David Scutt (follow him on twitter here) from marketscuttlebutt has a good post on volatility, explaining the Aussie volatility index or XVI as its called here:

vix
Mirroring the decline in the US VIX, Australia’s benchmark ‘fear index’ has also fallen back towards all-time record lows of late. Currently it sits at 11.116, a level only fractionally above the all-time contract low of 10.591 struck on January 14 last year.

While Central Bank easing helps explain the lack of volatility, it must be said that the index rarely stays around these levels for long. With the index now sitting at half its long-run average, the case for renewed volatility, albeit less that what we have seen in recent years, continues to grow.

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:

xviweekly

And the CBOE VIX:
vixw

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:

xjoatr

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!

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Comments

  1. migtronixMEMBER

    Stoopid double post, I think I’ll take the opportunity to hate on 3d and those ineffective meds he pimps

    • migtronixMEMBER

      Right? That’s what I was earlier on about Northern autumn. Seems like a lot of cash is sitting parked – hence Draghi’s move – and the vix is crushed. Someone, somewhere, is going to dump money market funds , then it’s on!

      • J BauerMEMBER

        So would you buy a VIX ETF and hope for some volatility before the cost of holding it eats your capital?

  2. It’s the conventional thinking breakout opportunity I’ve been waiting on – & on……

    Currently it’s like the markets are being strangled to death.

  3. Lack of volatility in the ASX? Where? I have had plenty of volatility this FY.

    Oh, you mean in the ASX8?