U.S. and European equity markets will soon experience a surge in volatility following the tightest squeeze in their trading ranges in three and five years, respectively, a technical analyst at ING Groep NV said.
“A larger move is coming given the shrink in volatility,” Roelof-Jan Van Den Akker, a senior technical analyst at ING in Amsterdam, said in an e-mail, referring to the Standard & Poor’s 500 Index. “The first move could be down,, followed by a sharp rally into the year end. The short-term weakness offers a perfect buying opportunity.”
The so-called Bollinger BandWidth indicator, a measure of historical volatility, for the S&P 500 (SPX) narrowed to 3.21 on Oct. 22, the lowest figure since December 2009. The same signal on the Stoxx Europe 600 index fell to 3.06 on Nov. 9, the lowest since May 2007.
Bollinger Bands combine information on price, momentum and volatility to create trading-envelope charts. BandWidth measures how broad or narrow the envelope becomes. Technical analysts interpret the size of the gap based on the principle that low volatility begets high volatility and vice versa.
The S&P 500 is trading outside the Bollinger envelope. The gauge crossed below the lower band on Nov. 7, as U.S. President Barack Obama won a second term in office, data compiled by Bloomberg show. Some analysts interpret such a move as an anomaly that suggests the band, and volatility, will expand.
Van Den Akker said the S&P 500 recently formed a top. The equity benchmark may now slide as far as 1,335, creating a short-term buying opportunity, before resuming its advance.
Technical analysts study price charts to predict changes in securities, commodities, currencies or indexes.
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