Volatility Pockets in Gold and Silver for April

Apr 15, 2013: 9:50 PM CST

With the recent collapse (lack of liquidity/buying pressure) under longer term support levels in gold and silver, let’s take a moment to step back and view historical “Volatility Pockets” in price and what this may mean for the current “pocket.”

Let’s start with Gold:

The Daily Chart above shows two range or volatility indicators:

The absolute value of the daily percentage change (meaning negative values return as positive values for comparison purposes) and then the daily range (defined as today’s close minus yesterday’s close).

If we focus our attention on what happened recently – which is very tempting – we risk losing the broader picture of the high/low cycle of volatility in price.

By that, I mean that volatility (range) tends to be cyclical.  It’s a long-standing principle that price tends to alternate between periods of range contraction and range expansion.

In sum, volatility has a cycle – volatile periods tend to arise from low volatility periods and then high volatility periods tend to wind down or compress into a range.

We can see these periods in the highlighted regions.

While there’s much we could discuss about this concept, the main idea for this post is that periods of high volatility – or high volatility ‘pockets’ – tend to last for multiple sessions if not weeks or even months.

The two pockets from 2008 to present that stand out most obviously are the October 2008 to April 2009 period and then the August 2011 to March 2012 period.

We can also note the compression or contraction in volatility that preceded each of these events, just as we can note the range compression that occurred before the surprising developments recently.

The picture in Silver is similar in terms of Volatility Pockets:

The same pockets of high and low volatility appear on Silver’s chart.

For quick comparison purposes, Gold’s 9.3% movement today compares to – but exceeds – the 8.4% daily increase on September 17, 2008 and also the 7.4% increase of March 17, 2009.

Yes, volatile moves can also occur on movement to the upside.

However, while Silver made a larger percentage move today (down 11.3%), it did not exceed the 17.5% collapse of September 23, 2011 (which was preceded by a 9.5% decline the prior day).

In fact, today’s one day movement was comparable to the daily percentage change values from the 2008 “pocket” and less than the one-day 12.4% rise on March 19, 2009.

This should remind us that gold and silver are not exactly interchangeable as futures contracts – silver has shown a tendency toward larger daily percentage movement than gold.

The main idea is that we can expect additional volatility – a “volatility pocket” or period of higher than normal volatility – if history is a guide.

Be safe and consider dropping to lower timeframes to trade the heightened volatility (and consider reducing position size as a method of coping with higher volatility).

Corey Rosenbloom, CMT
Afraid to Trade.com

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Corey’s new book The Complete Trading Course (Wiley Finance) is now available

1 Comment

One Response to “Volatility Pockets in Gold and Silver for April”

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