Market Volatility

Market volatility changes can warn of impending trend changes in price.  Option and futures premiums increase due to an increase in volatility.  There are two major Indices that track volatility.  The first is the VIX or Volatility Index.  Developed in 1993, the CBOE's volatility index is a measure of volatility of the US equity market.  The VIX is calculated by taking the weighted average of the implied volatilities of eight OEX calls and puts with an average time to maturity of 30 days.  Most often it is considered a contrarian indicator, where high reading are considered oversold territory and low readings are overbought.  Notice as well that volatility measures often move inversely to the price trend of major indices.  

Rising volatility often confirms expectation of declining markets and corresponds with downward moving prices.  Falling volatility often accompanies rising markets and supports a bullish outlook in near term.  These are only indications but can be used to help build supporting evidence of price trend.  A confirming VIX reading supports price trend indications present in the markets.  A VIX that is not confirming price trend may suggest that the price trend is suspect.  

The second measure of volatility found in the market place is the CBOE Nasdaq Volatility Index.  One use in tracking volatility for option traders is in recalculating option price projections based on projected changes in volatility.  Determining the current volatility and extrapolating future possible values of volatility allows option traders to use option pricing systems like the Black Schoels to calculate possible price projections for an option given an expected volatility.  

A declining volatility level over time suggest that bullish sentiment exists in the markets for the longer term price trend.  A rising volatility level over time carries bearish sentiment.  Tracking volatility allows a glimpse of what traders feel are the possibilities of price trend in the near term.  Falling values in volatility suggest a bullish bias.  Rising volatility levels suggest a bearish bias.

Take a look below at historical signals on other market Indices.

Volatility usually moves inversely to price trends.

Russell 2000 and recent critical day signals.  Each critical day is given to members on average 3 days in advance.  When a critical day approaches, it cautions traders that a reversal of the shortest segment of price trend may occur.  Look at the flow of candle bodies leading into a critical day.  Each blue dot is a successful critical day.  A reversal of price trend occurs as prices come away from a successful critical day.  These signals help traders navigate the short term market by telling them when to expect reversals to occur.  A reversal in the short segment of price trend creates the peaks and valleys of the larger price trend.  This can be very beneficial to traders in options and futures as well as equity traders who trade with the larger price trend.

The OEX and recent critical days.  On the markets page are a number of end of day graphs with critical days plotted on various indices like the Philadelphia Semiconductor Index, the Russell 2000, Nasdaq Composite and the Major Market Index to name a few.  Take a look at other applications and you will start to understand the broad application of our research.  In trading, the trend in prices is the net of current supply and demand in the marketplace.  Trading with the trend often enhances your profits.  Knowing when a reversal in the price trend is likely to occur can significantly enhance you timing and your profits.  Join now, and get the edge.