Ever since the market bottomed in 2002, the market has traded in a very stable fashion, producing a steady series of higher highs. In fact, just last month, the S&P and Dow peaked at levels unseen in 3 ½ years. While the market has been relatively strong, it has been quite resistant to volatility and has often been subject to very tight trading ranges, particularly since the beginning of 2004. The lack of volatility is even more evident in 2005. Solid steady trading is ideal for investors but difficult for active traders because they are forced to compete for profits inside tighter spaces.

It has been a very long time since the market has been this quiet, and the charts suggest that the relatively "tame" market of the last 5 months is ripe for a good dose of volatility in the second half of 2005. Let's take a look at the charts:

Chart Notations:

• The previous S&P 500 monthly chart, showing 6 years of price action, addresses the long- and short-term time horizons.
  
  
• Since the market topped in 2000, it went into a very strong downward impulsion (or "dominant directional tendency"), where the S&P 500 lost 50% of its value. The time it took for it to bottom was approximately 2 years and 7 months (see gray marks).
  
  
• When the market bottomed in 2002, the S&P entered a correction phase. It is my belief that just about all corrective phases take longer than the preceding impulse. There is plenty of very logical reasoning and explanation behind the idea that corrective phases take longer than the preceding impulse. What is important now, however, is that the market is approaching an area in time where the corrective phase will exceed the impulse (see gray marks). This means a change in behavior is very likely just ahead of us. 
  
  
• Notice that, over the last 5 months (yellow mark), the market has been extremely quiet and narrow, in comparison to all the volatility that preceded it in the years before.
  
  
• At this point, the time is coming soon to expect, in the months ahead, a transition from a corrective phase back to an impulsive phase. This should give way to a higher degree of volatility, perhaps higher than any we have seen over the last 2 ½ years. The last 5 months are likely to be marked in the future as the quiet before the storm. 
  

Chart Notations:

• The previous intraday 15-minute S&P 500 chart addresses the very short-term time horizon.
  
  
• This 15-minute chart details the symptoms of a "quiet market" that we saw in the chart before that. Notice that the S&P here has been caught in a very tight range for 6 trading days now, ever since the fast decline (blue arrow). 
  
  
• We establish a neutral zone (gray) where the market had its largest and fastest move in this time period. If the market exceeds and holds above the neutral zone, we are looking for the market to move upward and take out prior highs (1210), and vice versa for downward breakouts.
  
  
• In this chart, we also note an inverted head-and-shoulders reversal (blue marks: L/S = left shoulder, H = Head, R/S = Right Shoulder). It appears to me that, on Thursday, the market attempted to move above the neutral zone and follow through on this head / shoulders reversal but failed as a result of Friday's action. It is very important to note that a failed pattern (such as the head / shoulders reversal) is likely to generate the opposite signal. In this case, we are seeing a failure of the head / shoulders reversal here.
  
  
• If the market moves below the bottom of the neutral zone, look for the lows on this chart to get taken out but only so long as it continues to trade below the bottom boundary of the neutral zone.
  
  
  

Chart Notations:

• The daily chart of the NASDAQ 100 shown previously addresses the short-term time horizon.
  
  
• Ever since the NASDAQ fell apart in early 2005, this speculative measure of the market has been very weak in comparison to its primary market counterparts, the Dow and S&P 500. The weakness in the tech sector has been a real drag to the rest of the population of U.S. equities.
  
  
• At this point, the Naz is moving toward the resistance areas, marked by a basic short-term trendline (blue) that coincides with a 50% retracement (red) to the short-term high in March.
  
  
• We will continue to assume that the Naz is still very much in the grip of a short-term downward impulsion and expect that the Naz will find resistance at these points.
  
  
• Over the short term, we will stay away from favoring the long side of the market here unless our technical marks are exceeded.
  

Fernando Gonzalez has more than 6 years of high-volume professional trading experience, with a long-term track record of profitability. He helped develop the original material and coursework for Online Trading Academy. He has designed and individually conducted courses for more than 400 trading students and several hundred others in lectures, forums and intraday participation within the Day Trading Education and advisory community. He has also co-authored a best-selling book: Strategies for the Online Day Trader, which reached the overall best-seller list on Amazon.com and the section bestseller list for Barnes & Noble and other notable sources.