Indicators  |  MAY 2006

Cross-Market Evaluations With Normalized Average True Range by John Forman

Stocks & Commodities V. 24:5 (60-63): Cross-Market Evaluations With Normalized Average True Range by John Forman This technique can be useful to longer-term traders for comparing tradables. Like Bollinger Bands, the average true range (ATR) indicator falls into the category of volatility-based technical analysis tools. It is grouped in such a way because rather than measuring the directional bias of a price move, it evaluates the amplitude of the price move ment over a given time frame. Such information can be useful in evaluating markets. J. Welles Wilder, the originator of ATR, reported that he found high ATR values often occurring at market bottoms following a “panic” selloff. You can see this in the daily chart of the Standard & Poor’s 500 futures (continuous contract) in Figure 1. As you can see, ATR rose during the market’s selloff over the September–October time period and throughout the choppy bottom phase that followed. Low ATR values, according to Wilder, are often found during extended sideways periods, such as those found at tops and after consolidation periods. That can also be seen during the December consolidation after the November rally. In addition, ATR can also be low (or at least falling) while a market trends if it does so in a steady but unspectacular fashion.

by John Forman