By Carson Dahlberg, CMT & Kirk Northington, CMT

Volatility has been amazing to watch. Literally, volatility has been volatile. Vols are pumped like this summer. But, that’s here. How about Europe? And, are there any differences between this summer and now? Let’s take a look at what volatility based QTA (Quantitative Technical Analysis) can tell us. Perhaps we can draw a more complete picture.

Presented first are the weekly and daily charts of the CBOE Volatility Index of the SP500 (VIX Index) side by side. These charts show volatility based technical analysis to provide levels of support and resistance, both projected (horizontal lines) and immediate (bands). Presented next, are the weekly and daily charts of the Dow Jones Euro STOXX 50 Volatility Index (V2X Index) on the Eurex. These are interesting because they’re the market participants’ expectations of future volatility of these markets. Here we have two major markets (US and Europe) which are where a lot of the current mess is located.

Now let’s begin applying volatility analysis and multi time framed analysis. We can begin to compare previous volatility events to now and draw some conclusions on what to expect of near term future volatility.

One similarity between the summer and now, as well as Europe then and now, is that a compression effect has been in place. This is when projected volatility based support is stacked tightly under price. This increases the support effect. What’s more is that the compression effect is observed on both time frames, adding even more support. This effect is shaded green on the charts.

The second similarity is that the first spike in volatility was a piercing of the N Bands which are designed not to happen unless it is significant (and usually driven by market participants adjusting to unexpected news). The second spike was within the N Bands. In a nutshell, the crowds have now adapted to the new volatility norm.

Third, immediate support is rising on both time frames. This is due to the N Bands rising. Imagine two moving objects approaching each other carrying momentum. The results are similar for the markets.

Finally there is a difference, and this is a major difference. On the daily time frame for both indices, there is now an established range within the projected support and resistance. This is shown on the chart with the vertical orange dashed line. These levels are predictive, with tested and known tendencies. Hence, strategies can be constructed around them.

The more granular and precise you’d like to be with your research, you’d need to drill down into a smaller time frame for a more continuous time series to analyze. In addition, you could carry out volume analysis on tradable instruments like VXX (intraday chart below), which offers exposure to a daily rolling long position in the first and second month VIX futures contracts. This volume leaves footprints of where market participants are clustering and acting in concert. This is demonstrated in the following intraday chart of VXX. I have shaded areas where our algorithms have found buyers (green) and sellers (red) acting in concert.

From the analysis of our objective indicators, there is a high propensity for volatility to remain elevated. This is very useful information to have, particularly the range that has developed. This can translate into actionable intelligence for not just equity traders of these markets, but options traders and hedgers as well.