Conventional wisdom has held that during the summer months, the markets have a tendency to go a bit quiet. Between Memorial Day and Labor Day, traders may reduce their exposure to focus on vacations and summer activities with their families while many companies also experience similar slowdowns.
However, while the Wall Street moguls enjoy their getaways in the Hamptons, there are likely to be sporadic spikes in volatility. Although the months of May, June, and July are the three lowest average months for the VIX Index, August has historically presented some high volatility events.
For day traders, the widely accepted mantra of “Sell in May, and go away” does not necessarily apply. One of the advantages of day trading versus the buy-and-hold mentality is that market direction is not a factor. Whether the market goes up or down, a day trader can generate trade opportunities from moves in either direction. Often fueled by pure speculation, unexpected volatility spikes can sustain an active summer of trading.
The VIX chart below created using NinjaTrader shows the measure of expected future volatility over the past five years. The Fisher Transform indicator has also been applied in the panel below. The VIX index moves in an almost binary fashion which is why it is widely used to identify sentiment extremes and market reversals.
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