Volatility on 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:

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:


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!