Stockmarket volatility has fallen to a six-month low, and an
increase in volatility should be expected. As volatility expands,
we should learn the direction of the next major trend.
Volatility Contraction Points to a Big Move
Prices ended last week with only a small change.
SPDR S&P 500 (
lost 0.21% and
PowerShares QQQ (Nasdaq: QQQ)
, anETF that tracks the 100 largest Nasdaq stocks, fell 0.37%.
Volatility declined throughout the week, and now volatility in SPY
may be pointing to bigger price moves ahead.
Market volatility tends to move in cycles from low to high
values. Volatility has now fallen to a new six-month low. In the
chart above, volatility is shown in the center with the Bollinger
Bandwidth. This indicator measures the distance between
theBollinger Bands . Previous six-month lows in this indicator are
highlighted by vertical lines. A price move of at least 6% within
the next two months followed each of those signals.
Volatility indicators tell us only that a large price move
should be expected. Other indicators, like the Bollinger Percent B,
canoffer clues about the probable direction. In the two examples
shown in the chart above, prices moved up after the Bandwidth
signal while Percent B was rising. SPY fell when Bandwidth was
falling as volatility contracted. These indicators point to a
possible decline in prices in the weeks ahead.
ProShares Ultra S&P500 (
, a leveraged long trade, lost 0.45% last week. I have beenbullish
on this ETF for the past month, but I think it is time to take
profits on this trade. We may see some more upside but the
indicators show that there is a high degree of risk in the market
now. Leveragedfunds can magnify those risks, and closing this trade
with aprofit of about 6% in a month seems like the safest approach
to the market this week.
Action to Take -->
Sell SSO at themarket price .
Gold Sets Up a Short Trade
SPDR Gold Trust (
fell 0.62% last week and is now trading at an importantsupport
GLD has fallen to the bottom of a trading range that has
contained theprice action for more than three months. If GLD moves
decisively below $164 and breaks its200-day moving average , then
it could be a short trade. Rather than shorting GLD, I would
PowerShares DB Gold Short ETN (
, an inversefund that would gain when gold prices fall.
Action to Take -->
Place a buystop order on DGZ at $11.86. Set stop-loss at $11.
Setprice target at $13.15, which would be a new52-week high .
If GLD bounces off support, then the buy signal would be
confirmed near the midpoint of the trading range. At that point,
the trade would offer a potential gain of about 4% and risk of
about the same amount. Until the chart of GLD looks more bullish,
long trades seem unlikely to be winners.
This article originally appeared on TradingAuthority.com:
Market Outlook: Gold is Dangerously Close to
Issuing a 'Sell' Signal