We will be using our Volatility-Based Technical Analysis (VBTA) to gain additional perspective to what can be offered versus traditional technical analysis. During the last two months, I continue to get asked the same question, “Don’t you expect a rally in volatility?” The answer has been, “No.” And it has paid off extremely well as we have been mostly long during this time period. And this was during the Greek tragedy part II and everyone and their mother trying to call a market top. Let’s take a look at what has been driving our opinion of compressing vols. Below, is the daily chart that I published on 2.4.2012 which comes from Friday’s close. I have shaded current/important support/resistance levels that we calculate through volatility math.
Here are the objective take aways:
•Support has continued to cascade lower
•Bounces in volatility have been countertrend off of said support and they have been contained well by resistance (can especially see this intraday – not shown)
•Trend & Trend Strength continues to be negative (hashed red lines circled below)
•VXN is not extremely oversold, volatility-wise (we trend compensate the indicator – circled in the bottom pane)•Immediate support and resistance (N Bands) are falling, giving VXN more room on the downside and less on the upside
•The biggest thing is the range created by volatility based support/resistance 14.81-19.10
In summary, the evidence points to vols continuing to compress. There will most likely be periodic hiccups, that are tradable though, if you know how to find valid support. In fact, if you pull up the chart, you’ll see that this upper level is holding nicely. I have also included some levels above this range. I would look to take action at these levels if some unexpected news were to come into the market place and drive the vols higher. Finally, I will be extremely cautious at the lower end of this range as it is support from multiple time frames. You can find out more about (VBTA) and The A Game Trading Letter which applies it here: http://metaswing.com/site/a-game-trade-letter/