Our Zero participation indicator switched from divergent to mostly negative yesterday as equities seem ready to finally paint a downside correction. Or are they? Equity futures over the past two sessions have been trading increasingly volatile with large signal spikes (in green on the second panel below) occurring first during and then after retesting our current all time high.
If you are a trend trader then past two weeks will most likely turn out to be your most productive ones of the year. As the old adage goes: The trend is your friend until it ends. Of course you cannot help but wonder if the end is in sight, after all we’ve come a long way since early November. So let’s talk about that and add a bit more context which I believe may be of value if you’re still holding long (or are anxiously waiting for an opportunity to go short).
If you have been visiting regularly then you probably recall some of my earlier posts on realized volatility . For the rest of you here’s a quick recap as it’s important to understand what realized volatility (RV) is and how it compares to implied volatility (IV). Simply RV measures the amount and amplitude of price change observed in a financial instrument over time. Big moves to the up side and down side will both produce spikes in RV. As such the volatility we measure or predict always produces an unsigned return – it does not care whether the market goes up or down.
We don’t have much to work with right now as my charting universe separates into two groups right now. The first one is on a burn (e.g. Euro pairs and various commodities) and the second is parked in sideways mode (e.g. precious metals and equities). Can’t squeeze blood from a stone, as they say…