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Volatility Measurements

Market Volatility (VIX) And The 20-Day Volatility Index

Each of the above charts is labeled. The VIX is a measurement of "implied risk" and differs from the other measurement in that it is not a direct measurement of price volatility. The VIX is related to the demand for puts and calls and their prices. Traders associate readings above 45 with investor fear. At these levels, we tend to see capitulation selling. People are giving up what remains of their positive attitudes about the market. This is seen as positive because it often means the market is bottoming. A reading of 30 is associated with high volatility (there is heightened fear and uncertainty in the market). Readings in the range of 20 to 25 are usually associated with a casual nonchalance on the part of investors. Readings below 20 tend to correspond to a lack of investor "enthusiasm" (the market may be nearing a top). In general, the VIX tends to increase as the market declines and decrease when the market is rising. Why? When the market is rising, it is believed to be less risky but more risky if it is on the way down.

The purpose of the Volatility Index is to let us know if the price action is becoming increasingly "frenzied" or "calmer" within a larger historical context.  Here we begin our measurement by computing the standard deviation in closing prices over the last 20 days.  For a historical context we use the 100-day average of the 20-day standard deviation.  This enables us to see how the current 20-day standard deviation compares to its average over the last 100 days. 

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