Current Intermarket Volatility Band Reference Charts

Nov 1, 2011: 2:34 PM CST

Following up with the Inter-market charts at the beginning of November, let’s take it a step further and quantitify the levels of volatility – using Standard Deviation Bands – of the S&P 500, Gold, Oil, and US Dollar Index.

Let’s start with the S&P 500 Standard Deviation Band Chart:

First, a little explanation about what we’re seeing.

Traders are familiar with Bollinger Bands, which draw two standard deviations (in a band) above and beneath the 20 period average (mean).

These charts built on that logic and add 1, 2, 3, and 4 Standard Deviation Bands – also known as “Sigma Bands” – from the same 20 day moving average (mean).

The general rule is that periods of high volatility (range expansion) tend to be followed by periods of low volatility (range contraction/compression), and we can use different indicators – like Deviation Bands – to quantify volatility.

The Average True Range along with Keltner Channels are another good way to quantify volatility.

The general rule for high volatility markets is to reduce position size and increase both targets (to play for) and stop-losses (a tight stop in a volatile market will get you nowhere).

In this sense, we adjust our strategies and position sizing to match – or at least accommodate – changes in the volatility environment.

So what we’re looking for is the current Standard Deviation Band levels along with the distance between the two Standard Deviation Bands, also known as “Bollinger Bands.”

The Red Levels in the chart reflect the 1, 2, 3, and 4 Standard Deviations BELOW the mean/average while the Green Levels reflect the same bands ABOVE the mean.

The Blue Line is of course the mean, or 20 day simple moving average.

Jumping right in, the current distance between SD +2 and SD -2 is 146 points – that’s clearly higher than the longer-term average, as it reflects the day-over-day 15% rise from October 4th to October 28th.

Interestingly, the S&P 500 reversed down from the Second Standard Deviation level near 1,290 – that’s the main reason to use Bollinger Bands (find ‘over-extended’ price swings that are more likely to reverse than continue over-extending).

And currently, the S&P 500 bounced solidly off the rising 20 day SMA (blue) at 1,217.

Notice how the S&P stayed between the 1st and 2nd SD Bands during the recent swing up – that’s always interesting.

Now, let’s take a quick reference look at Gold, Oil, and the Dollar:

We’ll move quickly through these charts – once you understand the logic of what the volatility bands mean, it’s just a matter of referencing where price is in relation to the current bands, where it’s been (and any interesting facts/inflections), and what the current 2 SD Range is.

For Gold, it’s $151 between +2 SD and -2 SD – that’s higher than normal, but less than the difference in the run-up after July and then in the ‘crash-down’ in August, but still to some traders, ‘moderately high’ is still  too high.

Oil similarly reversed down after traveling between SD +1 and SD +2.

The current distance between the two upper and lower Bands (Bollinger Bands) is $15.50.

Finally, the US Dollar Index – which generally trades inverse (opposite) of commodities and stocks – rallied sharply UP off its lower SD Band at 74.86 after the Yen Intervention Monday.

With reference to the “Bollinger Band” distance of 4.15, this level of volatility is at one of the highest levels of 2011 (the chart covers the entire year so far).

Use these charts as a reference for both historical and current volatility norms for 2011 and adjust accordingly.

Corey Rosenbloom, CMT
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1 Comment

One Response to “Current Intermarket Volatility Band Reference Charts”

  1. Meilievlad Says:

    are you sure?