Asset Classes

Free investment financial education

Language

Multilingual content from IBKR

Close Navigation
Learn more about IBKR accounts

Chart Advisor: Bulls Ride Volatility’s New Wave

Posted November 16, 2023 at 8:27 am
Investopedia

By Alex Cole

1/ Reduced Volatility Leads to Increased Volatility!

2/ Bollinger Band Squeeze

3/ Checklist Gets More Complicated

4/ GoNoGo Squeeze $SPY Examples

5/ Comcast Corp Squeeze 

Investopedia is partnering with CMT Association on this newsletter.  The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice. The guest authors, which may sell research to investors, and may trade or hold positions in securities mentioned herein do not represent the views of CMT Association or Investopedia. Please consult a financial advisor for investment recommendations and services.

1/ Reduced Volatility Leads to Increased Volatility!

During the most intense struggles between buyers and sellers price action stagnates, volatility declines and markets can move sideways. This doesn’t mean a lack of enthusiasm.  During periods of reduced price volatility a security can still be heavily traded as market participants fight over direction.  As volatility is compressed, pressure builds and when one side of the market is proved right, meaning buyers overwhelm sellers or vice versa, we can see a high volatility move.  Think of it like a tube of toothpaste.  If you squeeze the tube of toothpaste without unscrewing the top eventually it will blow off! 

It is important for us as investors to be able to identify these reduced volatility situations as periods of low volatility are often followed by periods of high volatility. If we watch out for periods of low volatility, we will be better prepared for the start of a new trend, or a strong move within a trend.

Our challenge, as we have addressed all week, is to take advantage of what the market gives us without subjectivity.  How can we find these critical inflection points systematically?  Below is a GoNoGo Chart with a new volatility indicator, GoNoGo Squeeze (amber climbing grid), applied.

2/ Bollinger Band Squeeze

In an attempt to use objectively calculated indicators to seek out low volatility set ups, we may turn to an indicator like the Bollinger Bands.  Created by John Bollinger, this indicator plots upper and lower bands that are 2 standard deviations away from a simple moving average.  It is unusual for price to trade to the extreme of one of the bands.  The textbook teaches us that when the bands are narrow, and price trades up to and outside the bands, we should trade in the direction of the break.  Narrow bands indicate reduced volatility.  The Bollinger Bands technical study helps us identify these situations.  A companion study, Bollinger Band Width, shows us how wide or narrow the bands are at any given time.  We can look at band width to determine if the bands are narrow enough to make the decision to trade in the direction of the break.  Look at the below chart, with the Bollinger Bands and Bollinger Band width applied.  The green arrows note where the bands seem to have narrowed quite significantly and then price trades up to and out of the upper band (blue arrow).  

Now, we must accept at this point that there is some subjectivity with the decision of how narrow is narrow enough.  Look at the area where I have annotated with a ?.  Price has definitely traded up to and out of the upper band, but are the bands narrow enough for us to be confident in taking a long position.  Can we be sure that this is the start of a new bullish trend? Or is there reason to believe that price will mean revert, moving lower?

3/ Checklist Gets More Complicated

In order to answer the last question, we can of course turn to our disciplined checklist of trend identification and momentum analysis as outlined in earlier articles from this week. (123) Let’s put all of what we’ve learned into the chart below.  The problem of analysis paralysis rears its ugly head once more.  Our chart is now extremely hard to read, a case of not being able to see the forest for the trees perhaps. The price panel has become small, and we would be hard pressed to do any traditional analysis such as using trendlines, or placing support and resistance levels on the chart. Both of these techniques offer much value to the technician.

4/ GoNoGo Squeeze $SPY Examples

With GoNoGo Charts, every effort is made to include all of the valuable information from the most trusted and foundational concepts of technical analysis.  That information is then displayed in a way that leaves the chart free from clutter and easy to read.  The same approach is taken with identifying volatility squeezes.  We know from yesterday’s article the importance of the GoNoGo Oscillator’s interaction with the zero line.  When the oscillator is stuck at that level, we know that all of the combined momentum inputs are in their neutral territory for an extended period of time.  There must be little to no directional momentum, in other words, low price volatility.  This volatility compression is highlighted by GoNoGo Squeeze using a visual grid overlaid in the oscillator panel that climbs for every bar the oscillator remains at zero.  With a prolonged reduction in volatility GoNoGo Squeeze reaches extremes preparing investors for explosive moves in the direction of the break. 

The chart below shows the same period of price activity for SPY as the previous two charts but with the GoNoGo suite of tools applied. The green arrows objectively identify two Max GoNoGo Squeezes. 

With GoNoGo Squeeze we have been able to incorporate an understanding of volatility into the chart without losing our knowledge of trend from GoNoGo Trend and momentum from GoNoGo Oscillator.

5/ Comcast Corp Squeezes

In this final chart, let’s look at a current example of how we could use GoNoGo Squeeze in conjunction with the other GoNoGo indicators. 

This is a chart of Comcast Corp, (CMCSA) with the full suite of GoNoGo tools applied. This is a fascinating chart as it has 3 Max GoNoGo Squeeze’s identified.  The first, comes in the form of a trend reversal.  After a lengthy “Go” trend, price moved sideways for a few weeks. GoNoGo Trend struggled to continue painting only “Go” bars and we saw a few amber “Go Fish” bars creep in.  This indicated uncertainty in the health of the “Go” trend. Then we saw the GoNoGo Oscillator ride the zero line for an extended period causing a Max GoNoGo Squeeze.  When the Squeeze was broken into negative territory, a new “NoGo” trend took hold.  Since then, GoNoGo Oscillator has been at or below the zero line as we’d expect in a strong “NoGo” trend (article 3).  As it has risen to test that level, we have seen multiple instances where a lack of directional momentum has caused a Max GoNoGo Squeeze to form.  Each time so far, the squeeze has been broken into negative territory, confirming the “NoGo” trend that we see in price.  Currently, another GoNoGo Squeeze is being built.  We will watch to see if it is broken yet again to the downside.  If it is, we will see another NoGo Trend Continuation Icon (red circle) and can expect price to retreat lower.  If the Squeeze is broken by GoNoGo Oscillator moving into positive territory instead, then that would be a threat to the “NoGo” trend and could lead to a reversal.  We would watch for GoNoGo Trend to confirm.

Originally posted 16th November 2023

Join The Conversation

If you have a general question, it may already be covered in our FAQs. If you have an account-specific question or concern, please reach out to Client Services.

Leave a Reply

Disclosure: Investopedia

Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy.  While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Investopedia and is being posted with its permission. The views expressed in this material are solely those of the author and/or Investopedia and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: ETFs

Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

IBKR Campus Newsletters

This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.