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About a week ago, I shared my views about a consolidation pattern in the
S&P. The pattern still has not resolved itself. The 14-day ADX is now
at 14, which is a level that, in the past, large moves have started from
(the most recent being Jan. 98). I went to a weekly chart looking for
more clues as to which way this market is going to go. Last week was a
ID/NR7---an inside week with the narrowest range of the last 7 weeks
(Crablel & Raschke). Volatility and range are mean-reverting. This
type of range contraction can also precede large moves. It gets
better--as of yesterday's close, this week is another ID/NR7!! Many of
the volatility ratios that Larry Connors has made public are near 0.5
(meaning the short-term volatility is almost half of the longer-term
volatility).
All these patterns and indicators are telling me that there will be an
expansion of volatility. I usually will place both buy & sell stops in
the market and let the market action pull me into the trade. I do not
trade options and I am not aware of the current implied volatility, but
I would think some type of straddle is appropriate here.
For those of you that use oscillators, I am curious to hear whether you
have had a tough couple of weeks. It has been my experience that
oscillators do not work well in this enviroment of range contraction
(probably because there simply are no oscillations to measure!).
It is easy to get comfortable is this trading range. Many times newbies
will "fall asleep" because they get bored since the market is not moving
anywhere fast (I know from experience!). I urge everyone to pay
attention, because if this market were a coil, it would be wound up.
Bill Bancroft
P.S.-- I will be leaving today for a mini-vacation, and as such, I will
not be able to reply until Monday. Your patience is appreciated.
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