ThE hAnDbook of TEChnICAl AnAlysIsfigure 21.26 Volatility Cycles on the 15‐Min USDCAD Chart.
Courtesy of Stockcharts.com
trader should be able to take advantage of these consistent daily cycles. The cycles
in the ADX cycles afford traders the best time to get in for breakout type trades.
Volume cycles, which represent the volatility in market participation, provide
traders with a high probability daily reversal point in the markets, which normally
occurs at the daily volume blow‐off point. The ATR cycles also provide traders
with a basis for determining their stop sizes, allowing for larger stops during the
most volatile phase of the ATR cycle. Another instance where there may be pos-
sibility of a sudden burst of activity is when very high levels of open interest are
seen in the futures market during the consolidation phase, especially if they are
located near historical market highs. The tremendous volume of traders buying,
selling, liquidating, and covering during such a consolidation usually precipitates
strong breakout.
But does volatility indicate possible future market direction? The answer is
affirmative. There are a few basic scenarios where this occurs:
■ (^) Price testing the upper or lower Bollinger bands has a greater tendency to re-
verse at the bands than elsewhere within the bands.
■ (^) Whenever a large broadening formation (which is regarded as a highly volatile
chart pattern) is identified at the end of an aggressive and protracted trend,
it is usually a bearish indication of a potential reversal. It is more bearish at
market tops than bottoms.
■ (^) Any large and complex formation appearing and interrupting a strong trend
is an indication that the market dynamics have changed and therefore may be
regarded as a prognostication of a potential change in market direction.
■ (^) Historic highs in the VIX and Put‐Call ratio are an early indicator of a poten-
tial market bottom.