Volatility Pointing at More Stock Market Upside
February 6, 2006
If you're a first time visitor, I encourage you to subscribe to the RSS feed so you don't miss anything. Thanks for visiting!
John Forman - The Essentials of Trading author
I have just finished writing an article which has been submitted to Stocks & Commodities for possible future inclusion in that magazine. I’ve had other articles published there, most recently in the December issue. The latest effort is on the topic of the Average True Range indicator (ATR), specifically regarding a way to modify it for more effective comparative analysis. In the process of picking out examples for inclusion, I was caught by what I saw on the chart of the S&P 500 futures.
On the above chart (monthly S&P 500 futures) make note of the lower plot, which is a normalized verstion of ATR I refer to as N-ATR. By normalizing the indicator we can look at it on a comparative basis, which is difficult for the basic study as it is purely a price reading. As such, at higher prices ATR will tend to have higher readings, and vice versa. The N-ATR, though, expresses volatility with the perspective of current prices. As such, one can use it to compare diverse time spans and to look at two securities side-by-side.
In this particular case, it is worth noting the behavior of N-ATR. The readings currently are quite low and declining. The last time the level was this low was back in the mid-1990s, when the market was starting to get very exciting. Eventually the volatility rose significantly, things turned around, and the sell-off made the ranges even bigger. We can note, however, that the bulk of the rally occured with N-ATR running at a relatively low level.
With that in mind, it makes me like the prospects for the stock market over the next months, and perhaps even years.
Here are some other posts which might interest you:
Comments
Got something to say?