Wednesday, April 25, 2007

Volatility Is King

Long time readers know that I hold the average true range as the key to volatility. Any other so-called volatility such as the VIX, VXN, or VXO are pretenders in my humble opinion.

Long time readers also know that whenever I make a bold statement I try to back it up with evidence - here is the evidence -


You can see where the ATR was during the "bubble" of the 90's. It began below 600 (monthly charts please) and then slowly climbed to over 900. 900 seemed to be the catalyst for the fall because once it broke 900 there was too much volatility and not enough liquidity to sustain the price and the market fell.

We've seen this picture on this BLog before - most notably on the daily basis since the 27th of February. You can see that the ATR did not break until the market bottomed - at that point it began to fall in a significant manner and the market resumed its climb. Notice too that well before the market completed its fall that volume was cut almost in half.

Now a lot of people are going to be saying all kinds of doom and gloom crap about Dow at 13000. All you need to remember is that the only number that matters is the ATR at 505.

And I know that there are hundreds of people, maybe even thousands who would disagree with my every statement - but none of them can produce a picture like I can.

But always keep Rule 1 firmly in mind - nobody knows nothing - including me.

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