Wednesday, April 29, 2009


The indecision continues... and one direct result of this chop is realized volatility on the market has diminish significantly. How so? Well, one of the simplest measures of realized vol is the ATR (average true range). ATR is an indicator that compares trading ranges for successive time periods. The ATR I’m using calculates the average range per day for the last 14 days (14 days is typically the default). Currently it’s at about $2.10, which is the lowest it’s been since Jan 13 where it briefly touched $2.10. Before that you have to go all the way to end of Aug to get an ATR that low.
Keep in mind, ATR is NOT used to forecast direction or duration of movement. It merely measures level of activity or volatility. Low ATR levels signify quiet markets in small ranges. High ATR levels signify larger, faster moving markets in wider ranges. Although ATR doesn't predict direction, it does tend to peak at market bottoms and trough at market tops. As such, in retrospect it’s easy to point out how past market bottoms or tops have coincided with high (see Green Arrows and Circles) or low (see Red Arrows & Circles) ATR levels. The key is knowing what’s *high* enough to be a peak & what’s *low* enough to constitute a trough. Truth is you never really know until it turns (think $VIX in fall of last year- where the market bottom could have been, and was, erroneously called at VIX 30, 40, 50, 60, and on up to 80).

So, could the current low ATR be implying a short term top in the market? Potentially… But I wouldn’t be too quick to pass judgment, or I’d at least like to see the market tip its hand by finally breaking below some support levels. The current sideways action could just be coiled spring waiting to finally pop… resolving itself by a decisive breakout above 875 on SPX.



Anonymous said...

Hey Ty good post I think it might resolve it's self to the up side if you look at sp 150sma and how it is down trending but the 20& 5 day ema are up trending spy apears to me to be making equal lows and higher lows and equal high's and higer high's in this triangel let me knoow your thoughts Mark psI put my first real trade on for the first time in a long time on fdo and it is going nicely

Tyler Craig said...


Thanks for you thoughts & congrats on the trade. Are you saying the declining 150 SMA and the rising 20 EMA are forming the triangle or are you connecting actual pivot highs & lows in the price? I'd be more prone to say SPY is in somewhat of a sideways consolidation, but whether you wanna call it a triangle or conslidation, the bottom line is breaking above 875 is bullish.