Financial market volatility has subsided following the surge surrounding the U.S. presidential election, but smart investors and traders know that periods of low volatility are always temporary. Volatility is likely to increase soon, and it could lead to a downtrend in stocks.
I stayed up late on election night monitoring financial markets and some clients. Those hours were some of the most volatile I've seen in 18 years as a futures broker. Markets remained volatile, although to a lesser degree, for a few more days before "falling to sleep."
This is normal. High volatility can last for only so long before it has to tail off and take a break. On the flip side, some event eventually comes along to trigger an end to low volatility. Whether you are simply monitoring your stock portfolio or actively trading futures, you need to understand these dynamics.
Below you will see two different daily charts, one of gold futures and one of the E-mini S&P 500 futures, which track the bellwether S&P 500 stock index. The lower pane of each chart shows a simple volatility index. Notice the recent inverse correlation of the price action in these two charts.
Gold Futures Daily Chart
E-mini S&P 500 Futures
I am looking for two main trends in the next few weeks and months:
1. For short-term traders, volatility will increase (most short-term traders prefer this), and that will change the daytrading environment. To adapt, daytraders must be "extra picky" about entry levels, look to make smaller initial trades and adjust stops and targets if and when volatility increases.
2. For longer-term traders, equity markets should top out, and a prices should start moving lower, governed by market forces and not by artificial stimulus. If I am correct, this would signal the start of a medium-term move higher for gold. It will not happen at once, it will not be easy to spot, and there will be "head fakes" along the way.
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