Sensex now swings to day-trader tune

On 12 days out of 21 in January and three out of four days in February, the Sensex has oscillated over 150 points intra-day, as against just once in December 2003. Also, a whopping 86 per cent or 18 times it has swung over 100 points compared to twice in December. In fact, all the four trading days during the first week of February have seen the Sensex move in access of 100 points during the day.

The average daily intra-day volatility calculated as the difference between intra-day high and low divided by the day’s close is the most simplistic way of measuring volatility.

“It is well-known that a lot of operators have found themselves in a payment crisis earlier during the month as the benchmark indices plummeted from their highs. This has had a cascading effect and many of them are still stuck with the mid-cap stocks bought at higher levels,” according to a Delhi-based market analyst. “Such operators have been forced to support the market at lower levels to avoid a sharp crash and thus a plunge in the value of their holdings. They have been actively playing the intra-day game leading to the rise in intra-day volatility,” the analyst added.

In October and November, the intra-day volatility of Sensex was much lower at 1.95 per cent and 1.8 per cent, respectively.

The intra-day range is also much higher than the inter-day range (close of two successive trading days). This indicates unstable markets, according to The Range Indicator, a technical indicator developed by Jack Weinberg in 1995.

The Range Indicator is based on his observation that changes in the average day’s intra-day range (high to low) as compared to the average day’s inter-day range (close to close) precede the start of a new trend or the end of the current trend.

“When the intra-day ranges are dramatically higher than the inter-day ranges, the market is considered “out of balance”. This may indicate an end of the current trend,” according to the study released in 1995.