The Calm Before The Storm

Random Thoughts

Volatility has dropped to very low levels. You can measure this by using ratios such as the 6-day vs. 50-day volatility ratio or you can just “eyeball” it. The 6/50HV is now at its lowest level since the October bottom. “Eyeballing” the chart I can see that Ps (S&P 500) have had relative narrow ranges and they haven’t made much progress over the last couple of weeks.

Volatility waxes and wanes. Traders don’t agree for long. Large moves often occur after volatility compresses. Back when I did a lot of mechanical testing, I learned that the first move is often a false one out of a low volatility situation. With that said, brace for a big move but don’t be too quick to jump on just in case the market does a head fake.

On Friday, the Ps closed right around where the closed on “Monday, Tuesday, Thursday, Wednesday.” The point is that the shorter-term volatility had now reached an extreme low.

The Quack (Nasdaq) had been just drifting too.

I don’t like markets that drift after a big move. I’d rather see a correction and then a resumption of the trend.

Maybe in the ideal situation, the expansion in volatility will be to the downside. This would shake out and fake out some Nervous Nellies and clear the way for the market to trade higher.

Most of the sectors have been hanging in there like the market itself so there’s no need for me to filibuster. There are a few things of interest though:

Gold and Silver have woken up. There’s no need to be hero here though. Wait for an emerging trend pattern like a First Thrust or Bowtie.

Speaking of emerging trends, I’m seeing some Rare Earth stocks that are setting up.

Drugs, especially Biotech, sold of fairly hard late last week. I’m seeing setups here but make sure you wait for entries just in case the selloff continues.

So what do we do? “In times of war, prepare for peace*” and vice versa. Right now could be the calm before the storm. Brace for a large move soon and again, watch for a head fake. In the meantime, keep an eye on the Rare Earths and Biotech for opportunities but at the risk of preaching, wait for entries just in case. It never ceases to amaze me how many times this simple technique can keep me out of trouble.

Best of luck with your trading today!

Dave

*Sun Tzu