Classic Volatility Squeeze

Market Direction Model

The market in general has been flat for the last month. The Market Direction Model has changed from green to yellow by and large, in other words, from bullish to neutral.

The market in general is mostly neutral, however, the
Russel 2000 (small cap index) is bearish (red).

As I mentioned in the March issue of The Gerritz Letter, the small cap stocks often lead the markets higher or lower. With the small caps having turned down, we are now more vulneralble to a potential pullback senario playing out. I also mentioned that a spike in volatility would be the earliest warning that a market correction was at hand. At the moment volaltility is extremely low in the Russel Index.

Volatility Sqeeze

Bollinger Bands expand and contract as volatility goes up and down. A volatility squeeze occurs when volatility remains very low for a period of time.  It is only a matter of time before volatility begins to expand once again. The Woody Indicator (volatility indicator) quickly reacts to any changes in volatility; consequently, it produces very timely buy/sell/sell-short signals.

Low Road Senario:

If we get one or two 100 Dow point down days, volatility will spike and we will have our market correction.

High Road Senario:

Buyer continue to buy small dips and the market continues its slow grind higher.

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This blog post does not constitute an offer of investment advice. This blog is only provided for educational purposes. Please read the Important Blog Disclosure posted in the right channel bar.