Volatility

It looks like a conclusion I expressed in the last paragraph of my previous week's post (see "Technical Analysis" on 10/18/2009)" was correct call. Now, we may say that starting from the middle of October 14, 2009 the market has been trading in the sideway corridor. We may draw the upper line of this corridor trough the October 19, 21, 22 highs and the lower line of this corridor would be placed through the lows on October 16, 22 and 23. Three times the indexes (S&P 500, Nasdaq 100 and DJI) have bounced down from the upper line of this resistance corridor and now this is the third time when the indexes have come close to the lower. I think if the lower line of this corridor is broken then we may officially say that the stock market is in a correctional move down.

It is worth mentioning that over the last week we saw increase in volatility which could be considered as a Bullish sign. As a rule, lower volatility could be witnessed during up-trends and down-trends are accompanied by higher volatility. Over the last one and a half week we have several signals to go short, yet, they were not confirmed by an increase in volatility.

I mentioned in my previous post "it could be a good conservative trading strategy to wait in cash for stronger bearish signals". Now, if we take a look at hourly index charts we may see negative signals again, and this time the bearish signals are confirmed by an increase in the price volatility. Because of that I would say that at the end of this week the odds of the correction down are higher than they were last week (on October 16, 2009) when the indexes at the same level they are now.

Still, the technical analysis is not an exact science and the results of the technical analysis do not guarantee the market direction. The only thing I may recommend is to monitor charts. Personally I consider that an accurate analysis of several technical indicators should help any investors and every investor should have in his/her arsenal at least three technical indicators: 1) price based, 2) volume or advance/decline based and 3) one of volatility indicators. Maybe 50 years ago investors could rely on a single indicator in their analysis. Yet, the current market is not the same as it was before and you may not rely on a daily MACD only (or any other single indicator).