Using The Screens
Toby Crabel's Historical Volatility Scan

In the Historical Volatility Scan we use a mathematical measurement (using standard deviations and logarithms)of how much prices in a particular stock or market fluctuate over a given period of time. Two properties of volatility that you should be aware of: First it is quite cyclical, even more than price; and Second it is more highly auto-correlated than price changes. Basically this means that when volatility reverses direction it's more likely to continue in that direction. Thus once volatility begins to contract it will contract until it reaches a critical level and then it will expand again.

In this scan we compare the volatility over the last 6 days to the volatility over the last 100 days. We look for a ratio of less than 0.5 which simply means that over the last 6 days volatility has been reduced greatly (by atleast half) as compared to the last 100 days. The volatility ratio is the first number presented in the Toby Crabel scan. In addition to the volatility we also look for an inside range day which is to say a day with a lower high and a higher low than the previous trading day, and the lowest range day of the last 4 days. This indicates that not only is volatility contracting but so is price. The stops that are printed are the previous days high +.12 and the previous days low -.12. It is strongly recommended that when using this or any other scan you add in your own indicators and intuitive or "gut" feel to determine if it is a worthwhile trade. All of the scans are intended to give you stocks that fit certain criteria. Criteria that may or may not be suitable to you. However, the fact that these stocks have turned up means they are worthy of further attention on your part. They are not blind "Buys" and/or "short-sales". As stated many times as a web author I have no idea what your financial situation is, what your risk tolerances are, your preferred time frame and many other factors to be considered. Although I would consider stocks in this scan to be short-term trading vehicles, I have seen many times explosive moves occur out of this contracted volatility.

Now let's look at a few examples from the 5/18 posting date for trading on 5/19. On 5/18 there were 26 stocks mentioned in this scan. I have chosen 3 examples for today, two because they are issues I think everyone has heard of and the third because it represents well how to have a good predisposition on this scan. On the charts you will see the actual Volatility Ratio as calculated in the scan plotted.

In this first example AXP there were indications such as; Accumulation divergence, and RSI divergence, a flattening MACD line, to have a predisposition to the long side. When looking at the charts use your favorite indicators to give you a predisposition on which side to take. Otherwise if you take the signals blindly you will find yourself reversing positions to often.

In our second example PFE a predisposition is hard to take. MACD was declining and trading below the zero line. RSI was approaching oversold levels but not oversold as yet. Minus directional movement was higher than positive directional movement and the ADX was flat. However, the opening price was very near the high for the day so a stop/limit to go short might have been worthwhile for a quick trade that might develop further.

Our final example today is ACL ALCON. There were many good reasons on this issue to have a bullish predisposition. First the up-trend was strong and the chart looked just as if we were going through a consolidation prior to the next move. Directional movement was positive and the ADX was over 30 indicating a strong trend. PT-Indicators: Momentum was strong and Accumulation was trading above its rising moving average. MACD was above the zero line, RSI was not over bought but very close. While it is always possible the trend could have reversed here, the odds favored a continuation of the trend and thus the buy side a good signal. Aah that's the purpose of all this work, to help you uncover situations which fit your personal criteria.

A couple of important points to remember. First the stops mentioned are just outside yesterday's range therefore if the stock opens through that stop or right on that stop let the stock trade an hour then place your stop outside the range or look to take the other side only should that happen. Secondly look over your other favorite indicators to give your self a predisposition on which side to activate, if you are unsure stand aside. This can be and often is a powerful scan that can get you in at precisely the right point, however do your homework and have a strong predisposition before activating. Remember the purpose of these scans is to bring potential in front of you not as system recommendations. If you become familiar with and use this scan, with your proper predisposition's you will be pleasantly surprised by what you uncover over time.

If you cannot afford the time today to look over scans it may be worth your while to copy and paste the data into a spreadsheet on you computer to refer to later. You never know what day the right idea will present itself that will return you handsomely. That is why you must check every day.

If anyone has any questions please feel free to contact me!

Happy Trading
Bill

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