Updating Sigma Band Volatility Chart of the SP500

Jul 3, 2015: 11:16 AM CST

As we cruise into the Fourth of July holiday weekend, let’s take a moment to update our “Sigma Band Volatility” Chart of the S&P 500 and note just how far this week’s Greece news rocked the market.

We update volatility using Bollinger Bands to pinpoint key levels and provide structure.

Here’s the current Volatility – Sigma Bands (Bollinger Bands) – in the S&P 500:

Ok let’s break this chart down into something sensible.

What we’re seeing is the standard Bollinger Bands – a measure of standard deviation – expanded beyond the typical Bollinger Band indicator.

It’s still a 20 period indicator but I’m showing not just the two standard deviations above and beneath the 20 period average (blue), but the 1st, 3rd, and 4th standard deviation above and beneath the average.

This gives us a broader context within which to measure price movements.

For example, two times price plunged down to the fourth standard deviation level – December 2014 and recently on the Greece news gap last Monday.

Despite the ongoing uptrend, price has not reached the fourth band level so far in 2015 – despite  a strong rally in February.

This chart is helpful in quantifying volatility – as in “how many standard deviations away from the mean did price move” – and providing key levels at which price may reverse.

The further price has deviated from the mean – average – generally the more likely it is to “snap-back” toward that mean.

Check at a few additional recent posts on volatility and what it means for traders:

“A Quick Way to Measure Volatility.”

Current Low Volatility Environment Forecasting a High Volatility Future

“Quantifying Current Volatility in Dow, S&P 500, and NASDAQ”

So for now, note the expanded reference levels – starting with 2,022 (-4 level) to 2,169 (+4 level) and all levels in between.

The current mean or average is 2,095 and price is bouncing up off the 2,058 level currently.

Note how price has traveled within the bands previously and plan your current strategies accordingly.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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2 Comments

2 Responses to “Updating Sigma Band Volatility Chart of the SP500”

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