DIR Return Create A Forum - Home
---------------------------------------------------------
profxvictory
HTML https://profxvictory.createaforum.com
---------------------------------------------------------
*****************************************************
DIR Return to: Articals
*****************************************************
#Post#: 14--------------------------------------------------
Will We Ever Break Out of This Range?
By: fxvictory Date: September 13, 2014, 4:27 am
---------------------------------------------------------
Note: A version of this article was published on the Trading
Markets site 12/29/05.
I field a handful of emails each day, addressing topics ranging
from data analysis to psycho-analysis. Far and away the most
common recent topic among writers, however, is the current
trading range and its significance. It seems as though quite a
few writers expect a major breakout in early 2006. A common
refrain is that consolidation ranges lead to breakouts and major
trending movements. Most of my correspondents seem to favor the
upside on any such breakout.
Not wanting to rely solely upon speculative opinion or trading
lore, I decided to go back in time and examine trading ranges
such as we've had recently. My analysis went back to January,
1990 (N = 4014 trading days) and examined 20-day periods of
price change and volatility (trading range) in the S&P 500 cash
index. Here is what I found:
1) We truly are seeing historic levels of low volatility. The
price range for the past 20 days has been about 2.1%. This
places the most recent 20-day period in the lowest 1% of all
volatility periods for the sample overall. With the exception
of a single period in August, 2005, we have to go back to
1993-1995 to find comparable levels of low volatility.
2) I compared the quarter of 20-day data periods with the
lowest volatility (average range = 3.27%; N = 1003) with the
periods that possessed the highest volatility (average range =
10.88; N = 1003). Twenty days after the low volatility periods,
the S&P 500 averaged a gain of .49% (603 up, 400 down). Twenty
days after the high volatility periods, the S&P 500 averaged a
gain of .96% (588 up; 415 down). Low volatility periods were
just as likely to result in upside movements as high volatility
periods, but the upside was greater after those high volatility
periods.
3) I compared next 20-day volatility following the quarter of
occasions that were highest and lowest in volatility. The
average twenty-day price range following the high volatility
periods was 8.88%. The average twenty-day price range following
the low volatility periods was 4.46%. In other words, on
average, low volatility periods did not resolve into breakout,
volatile movements. Low volatility, on average, tended to beget
further low volatility and vice versa.
4) I looked at low volatility periods that also displayed small
price change, as we have seen recently. This provided a sample
of 173 occasions where 20-day price change was neither up nor
down more than .40% and where the price range was in the lowest
quartile for the sample overall. Twenty days later, the S&P 500
was up on average by .60% (111 up, 62 down), compared with an
average gain of .74% (2433 up, 1581 down) for the sample
overall. Interestingly, the average price range 20 days
following the low price change/low volatility periods was 4.43%,
below the 6.35% average for the overall sample. Low volatility
again led to low volatility.
What can we conclude? This certainly is a period of low
volatility and low price change. Such times have occurred over
the 16-year period studied, but have not resulted in a
distinctive directional edge 20 days later. There is a bullish
drift embedded within the 1990-2005 sample, and we see the same
drift following low volatility periods as at other times. That
doesn't mean that we cannot decline over the next twenty
days--indeed, may website has detailed some of my
intermediate-term concerns regarding weakness in the broad
market--but it does mean that there is no general, historical
bearish edge when price change and volatility are low.
What we do see is that low volatility does not generally beget
high volatility. The twenty days following a low 20-day
volatility period are more likely to have a narrow trading range
than a broad one. Putting all of one's chips on a breakout move
of large proportions may pay off, but the historical odds do not
support that wager.
*****************************************************