SP500 Sigma Band Chart Update to Start November
It’s been a while since we updated the “S&P 500 Sigma Band” Chart, so let’s take a quick glance at what the volatility/range indicator is saying to us currently.
What we’re seeing on the S&P 500 Chart above is an expanded Bollinger Band Indicator.
The traditional Bollinger Band or “Standard Deviation Band” indicator reveals two standard deviations above and beneath the mean which is often a 20 period simple moving average (as seen above).
The expanded Bollinger Band or “Sigma” chart above simply reveals four standard deviation bands (lines) above and beneath the 20 day simple moving average.
Finally, the blue line “Sigma Band Distance” indicator beneath the chart subtracts the lower band (-4 Sigma) from the upper band (+4 Sigma) to measure volatility as it cycles from periods of low to high.
Namely, we look for compressions in volatility (seen on the chart as a “Squeeze”) to break into periods of high volatility. We similarly expect periods of high volatility – like now – to relax into a lower volatility phase.
You can easily see the cycles or oscillations (waves) in volatility itself as price has traded up throughout the year.
At the current moment, we have the second highest volatility reading of the year though the indicator is turning down to signal the potential development of a lower volatility environment after the straight-up impulse from 1,645 to 1,770 through October.
We can see a similar impulse and spike – then compression – in volatility through July 2013.
Note how the Sigma Bands themselves are arcing back toward price, closing rank from the wide range phase.
For additoinal background material on recent volatility, see the prior updates:
“Updating TICK Volatility to Start October 2013”
“Three Quick Indicators to Measure Volatility”
And of course other posts (with more information) on Sigma Band Charting:
“SP500 Again Rides Sigma Bands in August 2012”
“SP500 Sigma Band Trading for March 2012”
“SP500 Continues to Ride Sigma Bands Higher (great lesson)”
“Gold Also Rides Sigma Bands Higher”
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Corey Rosenbloom, CMT
Afraid to Trade.com
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