Bollinger Bands Tightening Up on VXO
By
Rennie on Tuesday, August 11th, 2009 at 1:39 am
Stocks closed lower Monday in thin trading. Institutional participation was almost nonexistent – TICKscore closed at +1, Cumulative TICK +22,500. SPY volume collapsed to a six-month low as only 130 million shares traded hands. Pull up a chart of the VXO and note that the spread between the upper and lower bollinger bands has narrowed significantly in recent days. The ‘Band Spread’ indicator takes the difference between the upper and lower bollinger bands and divides it by that day’s close. When this number falls below 15%, it signals that volatility has fallen into an unusually tight trading range. Historically, the market tends to rally out of such low-volatility environments. The table below lists each of the last thirty separate instances in which the VXO Band Spread dropped below 15% (date on the left), followed by the date when the Spread rose back over 15% and the performance of the S&P500 in this time frame…
S&P500 Performance When VXO Band Spread Falls Below 15%
10/27/06 Buy 1377.34 – 11/20/06 Exit 1400.50… +1.7%
10/20/06 Buy 1368.60 – 10/26/06 Exit 1389.08… +1.5%
04/06/06 Buy 1309.04 – 04/10/06 Exit 1296.62… -1.0%
09/01/05 Buy 1221.59 – 09/06/05 Exit 1233.39… +1.0%
04/06/05 Buy 1184.07 – 04/07/05 Exit 1191.14… +0.6%
12/01/04 Buy 1191.37 – 12/21/04 Exit 1205.43… +1.2%
07/30/04 Buy 1101.72 – 08/02/04 Exit 1106.62… +0.4%
12/22/03 Buy 1092.94 – 01/02/04 Exit 1108.48… +1.4%
09/04/03 Buy 1027.97 – 09/24/03 Exit 1009.38… -1.8%
07/31/03 Buy 990.31 – 08/01/03 Exit 980.15… -1.0%
06/03/03 Buy 971.56 – 07/28/03 Exit 996.52… +2.6%
03/19/03 Buy 874.02 – 03/20/03 Exit 875.84… +0.2%
03/17/03 Buy 862.79 – 03/18/03 Exit 866.45… +0.4%
01/16/02 Buy 1127.57 – 01/17/02 Exit 1138.90… +1.0%
12/13/01 Buy 1119.38 – 12/19/01 Exit 1149.56… +2.7%
02/14/01 Buy 1315.92 – 02/21/01 Exit 1255.27… -4.6%
07/26/00 Buy 1452.43 – 08/08/00 Exit 1482.81… +2.1%
10/17/97 Buy 944.17 – 10/20/97 Exit 955.59… +1.2%
09/18/97 Buy 947.32 – 09/19/97 Exit 950.51… +0.3%
06/16/97 Buy 893.94 – 07/02/97 Exit 904.04… +1.1%
02/26/97 Buy 805.68 – 02/27/97 Exit 795.08… -1.3%
02/20/97 Buy 802.80 – 02/24/97 Exit 810.28… +0.9%
10/03/96 Buy 692.78 – 10/11/96 Exit 700.66… +1.1%
05/31/96 Buy 669.14 – 06/25/96 Exit 668.48… -0.1%
09/22/95 Buy 581.72 – 10/02/95 Exit 581.72… +0.0%
08/01/95 Buy 559.64 – 08/14/95 Exit 559.74… +0.0%
07/17/95 Buy 562.72 – 07/18/95 Exit 558.46… -0.8%
07/06/95 Buy 553.99 – 07/12/95 Exit 560.88… +1.2%
05/12/95 Buy 525.55 – 05/31/95 Exit 533.41… +1.5%
03/24/95 Buy 500.96 – 03/31/95 Exit 500.71… -0.1%
03/15/95 Buy 491.88 – 03/17/95 Exit 495.52… +0.7%
This setup wasn’t technically triggered Monday as the late-day slide in volatility left the VXO Band Spread indicator just above the 15% level. Still, it looks like it will be triggered Tuesday, especially on any rebound in volatility. VXO could close anywhere between 27.10 on the upside and 23.16 on the downside and the Band Spread indicator would fall below the 15% threshold.
Keep in mind that the bullish pre-FOMC announcement window begins at Tuesday’s close and remains in effect until 2pm ET Wednesday. The stock market has been three times as likely to rally from the close on the day prior to an FOMC announcement until 2pm on the day of the announcement. See my June 24th column for a recent track record.
Bollinger Bands Tightening Up on VXO
By Rennie on Tuesday, August 11th, 2009 at 1:39 amStocks closed lower Monday in thin trading. Institutional participation was almost nonexistent – TICKscore closed at +1, Cumulative TICK +22,500. SPY volume collapsed to a six-month low as only 130 million shares traded hands. Pull up a chart of the VXO and note that the spread between the upper and lower bollinger bands has narrowed significantly in recent days. The ‘Band Spread’ indicator takes the difference between the upper and lower bollinger bands and divides it by that day’s close. When this number falls below 15%, it signals that volatility has fallen into an unusually tight trading range. Historically, the market tends to rally out of such low-volatility environments. The table below lists each of the last thirty separate instances in which the VXO Band Spread dropped below 15% (date on the left), followed by the date when the Spread rose back over 15% and the performance of the S&P500 in this time frame…
S&P500 Performance When VXO Band Spread Falls Below 15%
10/27/06 Buy 1377.34 – 11/20/06 Exit 1400.50… +1.7%
10/20/06 Buy 1368.60 – 10/26/06 Exit 1389.08… +1.5%
04/06/06 Buy 1309.04 – 04/10/06 Exit 1296.62… -1.0%
09/01/05 Buy 1221.59 – 09/06/05 Exit 1233.39… +1.0%
04/06/05 Buy 1184.07 – 04/07/05 Exit 1191.14… +0.6%
12/01/04 Buy 1191.37 – 12/21/04 Exit 1205.43… +1.2%
07/30/04 Buy 1101.72 – 08/02/04 Exit 1106.62… +0.4%
12/22/03 Buy 1092.94 – 01/02/04 Exit 1108.48… +1.4%
09/04/03 Buy 1027.97 – 09/24/03 Exit 1009.38… -1.8%
07/31/03 Buy 990.31 – 08/01/03 Exit 980.15… -1.0%
06/03/03 Buy 971.56 – 07/28/03 Exit 996.52… +2.6%
03/19/03 Buy 874.02 – 03/20/03 Exit 875.84… +0.2%
03/17/03 Buy 862.79 – 03/18/03 Exit 866.45… +0.4%
01/16/02 Buy 1127.57 – 01/17/02 Exit 1138.90… +1.0%
12/13/01 Buy 1119.38 – 12/19/01 Exit 1149.56… +2.7%
02/14/01 Buy 1315.92 – 02/21/01 Exit 1255.27… -4.6%
07/26/00 Buy 1452.43 – 08/08/00 Exit 1482.81… +2.1%
10/17/97 Buy 944.17 – 10/20/97 Exit 955.59… +1.2%
09/18/97 Buy 947.32 – 09/19/97 Exit 950.51… +0.3%
06/16/97 Buy 893.94 – 07/02/97 Exit 904.04… +1.1%
02/26/97 Buy 805.68 – 02/27/97 Exit 795.08… -1.3%
02/20/97 Buy 802.80 – 02/24/97 Exit 810.28… +0.9%
10/03/96 Buy 692.78 – 10/11/96 Exit 700.66… +1.1%
05/31/96 Buy 669.14 – 06/25/96 Exit 668.48… -0.1%
09/22/95 Buy 581.72 – 10/02/95 Exit 581.72… +0.0%
08/01/95 Buy 559.64 – 08/14/95 Exit 559.74… +0.0%
07/17/95 Buy 562.72 – 07/18/95 Exit 558.46… -0.8%
07/06/95 Buy 553.99 – 07/12/95 Exit 560.88… +1.2%
05/12/95 Buy 525.55 – 05/31/95 Exit 533.41… +1.5%
03/24/95 Buy 500.96 – 03/31/95 Exit 500.71… -0.1%
03/15/95 Buy 491.88 – 03/17/95 Exit 495.52… +0.7%
This setup wasn’t technically triggered Monday as the late-day slide in volatility left the VXO Band Spread indicator just above the 15% level. Still, it looks like it will be triggered Tuesday, especially on any rebound in volatility. VXO could close anywhere between 27.10 on the upside and 23.16 on the downside and the Band Spread indicator would fall below the 15% threshold.
Keep in mind that the bullish pre-FOMC announcement window begins at Tuesday’s close and remains in effect until 2pm ET Wednesday. The stock market has been three times as likely to rally from the close on the day prior to an FOMC announcement until 2pm on the day of the announcement. See my June 24th column for a recent track record.