Quantifying Volatility in the 3 US Equity Indexes

Jun 4, 2015: 10:40 AM CST

With price tightly compressed in a lengthy range, let’s take a quick look at the S&P 500, Dow, and NASDAQ at the highs and quantify the current volatility picture in each of these indexes.

What’s the volatility environment and how are we measuring it objectively?

We’ll start with the S&P 500:

In each chart, I’ll be showing you the price action, Bollinger Band Width (middle), and Average True Range.

The Bollinger Band Width subtracts the lower Bollinger Band (a measure of standard deviation) from the upper.

The Average True Range measures daily range (high and low) and calculates that over 14 days.

Volatility is cyclical – price alternates between periods of high and low volatility conditions.

Be sure to read my reference update:  “A Quick Way to Measure Volatility.”

Also feel free to reference an earlier action post “Current Low Volatility Environment Forecasting a High Volatility Future” (which we’re still anticipating as volatility has compressed further).

Right now, we’re seeing some of the lowest volatility readings as both indicators register near their lows.

As price moves down from the all-time highs near 2,135, the BB Width is 47 points and the Daily Average True Range (ATR) is 14 points.

We can use these as objective metrics in our quest to quantify volatility.Here’s the US Dow Jones Industrial Average (“The Dow”):

The key inflection level is 18,000 and our Bollinger Band Width indicator is 475 points.

The Average True Range is trading to a swing low near 120 points.

A low BB Width means the Bollinger Bands themselves have compressed as is evident in price itself.

Finally, the NASDAQ “Tech” Index:

The NASDAQ’s BB Width has been steady near the 185 point level after a February spike to 500.

The NASDAQ’s Average True Range value is 42.50 points which means the average daily range is about 40 points.

If you detest this low volatility environment – or if you enjoy it – take comfort in knowing that this environment will give way to a high volatility future.

Strategies that work well in low volatility environments (range fading and complacency) don’t work as well in high volatility trending or breakout environments.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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2 Comments

2 Responses to “Quantifying Volatility in the 3 US Equity Indexes”

  1. Adil Says:

    I usually prefer to be trading with currency pairs only since they are far more profitable, but of course it can be changing, if I find better opportunities. My major liking towards currency trading is due to OctaFX broker that I am using. They have low spread of 0.2 pips, high leverage up to 1.500 and pretty sound customer service which is active 24/5 to help us with any problem or issue, so this way I am getting best out of my performance.

  2. Rick Johnson Says:

    Corey,
    I know the default lookbacks are 20 for the BB’s and 14 for ATR, but wouldn’t it be more realistic to use say 252 to represent a whole years trading days?

    Rick