January 22, 2009
The market reversed itself again, as prices fell after yesterdays strong performance. The drop was not as deep as Mondays decline as the NASDAQ lost -1.28 percent and the S&P500 was off by -1.52 percent. The DJIA, however, which experienced the mildest reaction on Monday, gave back the most some -2.75 percent.
The focus of yesterdays analysis was that large changes in opposite directions are characteristic at the end of a decline, and mostly occur close to the lower turning point. But volatility itself, and by itself, was not associated in the past with recovery. In fact, price volatility is one of the significant features that accompany declines in market value.
The figure below plots the daily price change percentage of the NASDAQ index, between January 2000 and today, and compares it to the closing price of the index. It shows that the size of the daily price change increases when the price declines. Moreover, it is clear that the price volatility increases far in advance of the lower turning point.
Accordingly, the reversal requires more than just an increase in fluctuations: in the past, these came mostly when daily price changes acted like a seesaw gone wild.
DJIA -2.75 percent
NASDAQ -1.28 percent
S&P500 -1.52 percent