DJ EuroStoxx50 Futures Volatility Forecast (24/07/2011)

DJ EuroStoxx50 futures rose significantly, at an almost constant rate, over the last trading days. In fact, the market opened at 2,631 on Monday, rose to 2,673 on Tuesday, touched 2,709 on Wednesday, jumped to 2,778 on Thursday and closed at 2,777 on Friday.

The actual volatility is 1.4% (22.2% annualised) and the TGARCH plot is showing a downward sloping curve that is right at the beginning of its mean reverting process which is probably going to end once the volatility curve will have touched the 0.8% threshold (12.6% in annual terms).

The high volatility environment of the DJ EuroStoxx50 futures has been largely caused by the renewed concerns about the sovereign debt crisis in Europe whilst the last bad news, which regarded Italy’s creditworthiness and stability, undermined once again the credibility of the European bail out plans sustainability in the long term.

In other words, investors and traders were afraid that the European Union could not afford bailing out countries as big as Italy or Spain and that’s why the last week as soon as the news started to converge towards the Italian short term debt auction the DJ EuroStoxx50 index began vacillating.

The HyperVolatility team is bearish this market because the symmetric effect between volatility and price action should be interpreted as a warning signal. Specifically, we believe that the market will give up most of the gains accrued in the last 5 days and retrace towards the 2,600 points.

However, the volatility should keep heading south and that is why we believe that the down move of the European Index is not going to be violent but rather constant.

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