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Every trader prays for volatility because without it, prices wouldn’t move and there would be no chance to make a profit. But too much volatility can be as deadly as a quiet market. It would be a crass understatement to say that we are experiencing tremendous volatility these past few weeks.
The stock market has been either going up or down by at least 1%, for more than 70% of the trading sessions these past three weeks. This amount of volatility is both extreme and rare.
While stop losses are getting hit all over the place, the good news is that this level of volatility has a good track record of signaling important market bottoms.
A good measure of price volatility is the technical indicator known as “Average True Range” - developed by Welles Wilder in his 1978 classic: New Concepts in Technical Trading Systems.
As you can see in the chart for the S&P 500, the average true range is as high as it has been since 2002 (yet another indicator hitting these chronological extremes).
In case the graph is too small to see, the 2000 signal was for the mid April 2000 “mini-crash”. On a chart like this one, the fall and snapback rally may seem insignificant, but if you were there during those days, you would remember the harrowing experience.
And since I haven’t been featuring the venerable Dow Jones enough, here’s a chart for it showing similar signals:
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