Volatility: Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

In other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time. source: investopedia.com

I share the definition of volatility as, from my experience, many retail traders often assume volatility = falling stock prices. While there certainly is a correlation with the $VIX (CBOE Market Volatility Index) rising during stock market selloffs, corrections & bear markets, the take-away here is that increasing volatility cuts both ways, with larger than usual price swings in both directions. For example, while the Aug ’15 sell-off was very swift, with hardly any counter-trend bounces, it is more common to see some counter-trend rallies in which the $VIX falls sharply for a day or two before resuming the sharp uptrend & correction in stocks.

$VIX daily Nov 7th

$VIX daily Nov 7th

While the FBI’s report of no new findings in the Clinton email scandal certainly played a part in today’s strong rally & was widely attributed to being the catalyst for today’s rally, the US equity markets were oversold all the way out to the daily time frames & had just completed the longest consecutive losing streak going back all the way to 1980 on Friday. While I didn’t foresee a one-day bounce all the way back to test the recently broken key technical level levels which had acted as support & resistance over the last year or so, it is far from surprising & most importantly, hasn’t inflicted any damage to the near & intermediate-term bearish case that has been made lately.

QQQ closed at 166.35, a mere 3 basis points or 3/100th of 1% above the key 116.00 level, i.e.- essentially a backtest of that recently broken critical support level while SPY closed at 213.15, just 45 basis points or less than 1/2 of 1% above the 212.20 former support level that contained most of the pullbacks since the breakout to new highs back in July. With a significant downtrend line just above, I wouldn’t be surprised to see a brief blip higher tomorrow morning or overnight in the S&P 500 index futures before the next major wave of selling begins. Also keep in mind that as I often discuss, it is very common to see prices on a stock or index to slightly overshoot a key support or resistance level when the buying or selling leading up to that level is very impulsive, as was the case today.

 

With that being said, anything goes. There aren’t any assurances that the market will or must reverse following today’s backtests of broken support nor that they are guaranteed to blast off to new highs & beyond, should the market manage to continue higher & regain these resistance levels by a fair margin. As stated earlier today, my point is simply that from an objective point of view & taking into consideration that the downside risk, if stopped out, pales in comparison to the profit potential for a short on on the broad markets, particularly the QQQ or IWM as two of my favorites.

I will also add that from my experience, assuming my analysis is correct & the markets are headed lower in the coming weeks to months, snap-back rallies following oversold & overextended drops such as the 9 day losing streak heading into Friday’s close, are typically very fleeting, usually only lasting a day or two. Only time will tell if today was simply a counter-trend bounce in the early stages of a much larger correction still yet to unfold or the end of another blip down on the road to new highs but from my read on the charts, I think that we’ll know sooner than later.