With 2009 coming into a swift close, and price forming the tightest consolidation of the year, let’s take a look at the entirety of 2009 so far and pay special attention to Volume and Volatility in the S&P 500.

Let’s see this indicator by indicator.

The first panel is – of course – Volume, which has been showing a persistent negative divergence for the better part of the rally off the March 2009 lows.

Unless something has fundamentally changed about volume – and that is entirely possible with the “dark pools” and other consequences of the Financial Crisis of 2007 – then the signal volume sends is that of a non-confirmation of higher prices.

Second, we have the 3/10 Oscillator, which also has been showing a persistent negative momentum divergence with higher price highs.  As price flirts with new 2009 highs, the oscillator is flirting with the zero level, well off the prior highs.

Next, we see the ATR or Average True Range.  This indicator is used to sum the average expected daily price move as a running total of the last 14 days.  The indicator is a measure of volatility, and is currently reading the lowest level of all of 2009 – value 13.  That highlights or signals a tight market compression… like a coiled spring.

Finally, we are looking at the Volatility Index – the VIX.  This is a favorite tool of Options Traders, but it can give stock traders insights into the volatility of the market.  Right now, the VIX is at its lowest levels of the year – just above 20.5.  Remember that we began 2009 with the VIX above 50, after peaking just shy of 80 in October 2008.

A low VIX signals ‘complacency’ in the market, which is confirmed by the tight range compression that began in November.

It’s been said that the “Big Boys” are going to try to hold the market steady right here until the end of 2009 so they can send out nice account statements to their clients, so no big fund is willing to rock the boat, so to speak.

The levels to watch are clear – 1,121 to the upside and 1,080 to the downside.  Any break solidly above or beneath that level could result in a strong momentum move… so be on guard as we wind up the final 10 or so trading days of 2009.

Corey Rosenbloom, CMT
Afraid to Trade.com

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