STA Blog

So far this summer markets have had a fairly torrid time, some stock indices setting new all-time highs in July, then peaking without warning and dropping by fairly large amounts over the last three or four weeks. Overlaid on this were interest rate moves by a select few central banks, and sharp revisions in the value of the Japanese yen. Nearly all financial media outlets reported these as percentage moves – usually breathlessly.

As you can already see in the paragraph above, there is much vocabulary which is relative, is an abstract amount, or cannot be compared to earlier prices in the data series. When dropping from a record high, point moves are likely to be much bigger than when rallying from a significant low. Central bankers are regularly ridiculed for being ‘behind the curve’ and when currencies are exceptionally weak and suddenly get caught in the headlights, they react fast.

Both implied and historical volatility are a relative thing depending on the market, liquidity and even the time of day. As the saying goes, when the thundering herd is on the move, the fire exits become very small.

Was there really no warning about what might have been around the corner? An optimist will agree. A technical analyst will be constantly monitoring the size of daily and weekly price moves, volume and implied volatility if available, and other oscillators they favour.

Moving averages, trend lines and other smoothing tools are used by many and act as a gauge of momentum in the instrument. This is perhaps at its most obvious in Ichimoku Cloud charts where these supply a series of support and resistance levels for today and looking ahead into the future.

And let’s not forget the famous chart patterns whose names even the uninitiated know of, like head-and-shoulders, cup-and-saucer and the kids’ favourite: rounded bottom.

As a seasoned (and some say cynical) market veteran I tend to ignore most screaming headlines. Nevertheless even I was shocked when I heard that US computer stalwart Intel managed to lose 28 per cent of its share value intra-day on Friday the 2nd August 2024.