ID4/Historical Volatility Set-Up Confirmed

Primary

Intermittently today the Primary Indicator I follow flipped positive and negative. Although by the end of day this finished positive by +10, I had a decision point when it was negative as to whether or not I would further cut down on my risk exposure and chose to do so by closing out a couple more positions including CNFL which I posted a few days back. There continues to be headline risk assessed in the market so I'd rather scale back positions to a more comfortable level of management and continue accordingly.

There's a set up of interest that completed today on the SPX which is described in the Connors/Ratchke book 'Street Smarts, High Probability Short Term Trading Strategies' that is based upon the work by Tony Crabel and is described as follows:

When volatility reverses direction, it is more likely to continue in that direction. Thus, once volatility starts to contract, it will continue to decrease until it reaches a critical reading. At this point, the cycle will reverse itself. Then when the volatility expands, the ensuing explosion will continue to propel the price in one direction. 

Inside Day 4/Historical Volatility < 50

The Set Up:

1. First, we will compare the six-day historical volatility reading to the 100-day

historical volatility reading. We are looking for the 6/100 reading to be under

50 percent (in other words, for the six-day historical volatility reading to be

less than one-half the 100 day historical volatility reading).

2. If rule one is met, today (day one) must be either an inside day or an NR4 day.

When both rules one and two are met, we now have a setup.

3. On day two, place a buy-stop one tick above the day-one high and a sell-stop

one tick below the day-one low.

4. If your buy-stop is filled, place an additional sell-stop one tick below the

day-one low. (The reverse applies if your sell-stop is hit first.) This will allow

you to reverse the position in case of a false breakout. This additional

sell-stop is done on the entry day only, and expires on the close of this day. A

trailing stop should be used to lock in profits on a winning trade.

If this set-up triggers then there may be an increase in volatility and a directional range expansion which may set the tone for the market in the near term.