| ShadowTrader Big Picture Market Analysis for February 27 |
| By Peter Reznicek |
Published
02/27/2006
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Stocks
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Unrated
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ShadowTrader Big Picture Market Analysis for February 27
 Good Morning, Traders. Ok, repeat after me....volatility contraction leads to volatility expansion.....(say it with me now)... volatility contraction (breathe in)...leads to volatility expansion (breathe out)..... Essentially this is what has been happening over the last three days in the market. The chart above is an hourly of the S&P 500, with the last three days of market action separated by the black vertical lines. Notice how the range of Thursday (2/23) fits perfectly inside of the range of the prior day (2/22). Then...Friday's range also makes another inside day where the range also fits inside of the high/low extremes of Thursday. This is a perfect example of volatility contracting. If you want to close your eyes at this point and repeat the mantra again, go ahead, I'll wait. In addition to this contraction of range, note that in the chart above, if you include the price action from Tuesday (2/21), you can see that a perfectly symmetrical triangle is forming when you connect the highs and lows of this 3-4 day range. Those trendlines narrowing to a point indicate that the expected volatility expansion is right around the corner. Today should be interesting. Which way will it snap? There really is no way of knowing at this point, and guessing at this juncture is akin to gambling, and we simply don't do that. Rather, as professionals we wait to see in which direction the train is leaving the station and then we hop aboard once we are sure that it is indeed in motion. What we must do is simply be aware of the contraction and be ready to act in either direction when it happens. If its downwards then obviously we retrace a bit, but if its up, then the expansion out of this range would be just what the S&P needs to break the 2006 highs (1294.90), and the Nasdaq to clear over the top of the trendline of the 2006 pullback which is the 2288 - 2291 area we have been discussing as of late. Strap yourself in...................
Peter Reznicek is Chief Equity Strategist for ShadowTrader.net a subsidiary of thinkorswim, and a Principal of the Prana Fund, a hedge fund. Mr. Reznicek can be reached at preznicek@shadowtrader.net.
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