What’s inside:
- August kicks off the beginning of the most volatile three-month period of the year, however...
- August can still be a tough month as volume is often low without a catalyst
- S&P 500 working on breaking its historically tight trading range
Today kicks off the first trading day of the month, and also the beginning of what has historically been the most volatile three months of the year. We pointed out recently that volatility hasn’t been this low in quite some time and that the CBOE Volatility Index (VIX) not long ago hit the lowest levels since August 2014. Not only should it pop sooner rather than later, but the general level of volatility is set to rise between now and October. Since 1950 – August, September, and October rank as 3,4, and 1, respectively, in terms of the average level of volatility in the S&P 500.
This is the good news. The bad news?
Trading in August can be difficult, because just as volatility is set to begin rising, volume tends to slump during the month as summer unwinds and people enjoy the last of the summer vacation months. This is generally the case barring a major catalyst, such as last summer’s swoon on fears stemming from China. So keep in mind, while volatility is on the verge of rising, we will want to reserve our excitement if the market doesn’t have a good reason to move. But, with that said, if you are in front of your screens then you need to stay alert and ready to act even if the market action at the immediate moment is ‘boring’.
On Friday, we noted the historically small trading range, and that we need to be careful not to get caught into any traps once it moves out of the range. In overnight trade the S&P moved above the top-side of the range set at 2174/78, but is now falling back to retest. A hold here will be important as a drop back inside will increase the likelihood of seeing a move to the low-end of the range in the 2155/60 area or worse.
Be mindful the market could whipsaw as it breaks the extended range, and shakes off the rust. Traders may want to wait until the market clearly extends away from the range with momentum before becoming involved at this time.
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---Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinsonFX.
He can be reached via email at instructor@dailyfx.com with any questions or comments.
