Velocity, not volatility

By Lawrence G. McMillan

Velocity.  That’s a term more commonly found in physics or aeronautical engineering or something like that, but stock market participants are becoming all too familiar with the word, even if they have no idea what v = Δx/Δt means.  Volatility is a measure of the size of market movements, but velocity is just the raw directional speed with which they occur.  After observing the market this week, I am more inclined to call what we are seeing as velocity, and not volatility.

Specifically, at the end of last week, the market was modestly overbought but had just made new relative highs; furthermore, most measures of intermediate-term market direction – especially the contrary ones – were bullish.  But, quicker than you can hit the SELL button on your computer screen, the market broke down badly on Monday and especially on Tuesday, slicing through what had been support at 1230 and 1220, before stabilizing.   Late on Tuesday and early on Wednesday, a swift upward reversal of 20 points took place, and it continued again today...

Read the entire Market Commentary from The Option Strategist Hotline (published on 11/3/11) by subscribing to The Option Strategist Newsletter.