Tuesday, September 4, 2007

MVIS- Volatility Squeezes

Everyone knows I'm a big fan of MVIS. For better or worse, it has been a core position of mine for 2007. I've noticed that the stock responds well to volatility squeezes. As I noted in a previous post, MVIS was setting up for another squeeze. It looks as if the move came to fruition in today's trading.

What is a volatility squeeze?

As a stock consolidates, the daily ranges begin to decrease. As these ranges get smaller and smaller, eventually the 20 day moving average will catch up with the price. As the stock hovers around the 20 day average, the Bollinger Bands will begin to tighten around the price. Tightening of the Bollinger Bands show that the standard deviation of movement (volatility), measured relative to the 20 day moving average, has decreased. For more information on Bollinger Bands, go here.

Like all things in the market, volatility comes and goes. But before a stock can become volatile, it must have consolidated. The volatility squeeze, as measured by tightening Bolligner Bands, shows that a stock has consolidated and is possibly subject to increasing volatility. Keep in mind that increasing volatility does not mean that the stock will go up. It could just as easily go down. I typically trade with the trend, so if the trend is up, I expect a squeeze will be to the upside.

On this chart of MVIS, I've put blue arrows everytime the Bollinger Bands tightened. With a couple of exceptions (notably the big move in July) tightening Bollinger Bands have brought higher prices.

The volatility squeeze is an easy play and can be identified with an indicator which is readily available on charting software. A stock with a strong uptrend will typically experience many squeezes over the course of its rise. However, a stock in a downtrend will experience the same squeezes, which will typically lead to lower prices. Finally, a stock which has experienced a fantastic rise and eventually rolled over may experience a prolonged period (many months or even years) of tightening bands, while never breaking out of the range. Take a look at ERS to see what that looks like. When ERS finally breaks out from its volatility squeeze, you can see it follows the primary trend- down.


Anonymous said...

Shedder, just wanted to mention again that I love reading your technical ponderings. Being a quantitave guy myself, I find your notes not only educational, but quite enjoyable as well.

Woodshedder said...

Thanks Kmorph. Strangely, I am increasingly reading more and more on quant strategies. I am finding that my math skills suck, and that I need a pre-cal and calculus class in order to progress much further.

khalihan said...

You also need some intuition and patience. After you have uncovered a nice stock, you need to hold your nerves. I used your tips to trade PFWD and SWHC for profit, while as per your own confessions, you didn't.

Woodshedder said...

Khali, down boy. I had SWHC from 12s to 19s. Check my log. It was a big winner for me.

As for PFWD, it has moved what, a total of 3 points since I did a post on it? Good for you for sticking with it.

Sierra Water said...

Holy crap Wood.. There after you! You have very good "intuition" by the way. LMAO. Another pretty picture with MVIS is that it has broken out of its descending triangle while at the same time you have a bullish convergence in Stochastics and MACD in oversold. Good stuff.

WallStreetHunter said...

Good read and info for me, the rookie.