There are two ways to interpret this measure of volatility. One method assumes that market
tops are generally accompanied by increased volatility (as investors get nervous and
indecisive) and that the latter stages of a market bottom are generally accompanied by
decreased volatility (as investors get bored).
Another method (Mr. Chaikin's) assumes that an increase in the Volatility indicator over
a relatively short time period indicates that a bottom is near (e.g., a panic sell-off) and
that a decrease in volatility over a longer time period indicates an approaching top (e.g.,
a mature bull market).
As with almost all experienced investors, Mr. Chaikin recommends that you do not rely on
any one indicator. He suggests using a moving average penetration or trading band system
to confirm this (or any) indicator.
