The Incoming Swell
Notes from The Lab: Forecasting swells with Parkinson Volatility Score
Beautiful Jacksonville, Florida.
Home of Lynyrd Skynyrd, mullet haircuts, the worst team in American football, and some of the East Coast’s best waves!
As an avid bodysurfer, I found myself on Jacksonville’s enchanted shores for the big swells that hit over Labor Day weekend.
After I swam out to my usual break, I noticed there were some new faces in the line-up. Out-of-towners who’d come from all over to enjoy the weekend’s waves.
In between sets I got to talking with one. He is an extreme surfer named Bodhi, who kind of looks like Patrick Swayze.
Bodhi told me how he and his team hunt big waves all over the globe…Mexico, Sumatra, Fiji.
I asked him how he predicts the timing and location of these waves. My assumption was that some app exists that I should download. But instead, he went on to talk about something called “swell math”.
“Me and my friends look at data maps like the ones on The Weather Channel” he said. “We use those to monitor the location of storms, track the speed of their movements, and watch the varying pressure levels in the atmosphere.”
He continued, “This allows us to estimate when large waves will arrive to shore so we can plan days or even weeks in advance. It’s how once in a lifetime type waves are now more like once a month.”
Fascinating.
And as I went onshore and thought about those sophisticated instruments I realized the team at Jarvis Labs does the same thing with crypto volatility! Which is the focus of this week’s chart from The Lab.
Grab your boardshorts and let’s hit the surf, this week I’ll show you why BTC may be about to encounter the swell of a lifetime…
For those that are new here, my name is JJ - the night shift janitor here at Jarvis Labs.
Once I started working here I noticed the professors and analysts of Jarvis Labs frequently leaving up charts, reports, and even equations on the whiteboard once they finally left in the middle of the night. The stuff seemed pretty important, so I started interpreting these things for myself.
It wasn’t long before I realized it was like trading cheat codes. And lucky for you, my friend is sick of hearing me talk about it.
Every week I will try to share the coolest and most exciting thing I find laying around the halls of Jarvis Labs. I hope you like it and follow me because if I get 1,000 followers on Twitter (@JLabsJanitor) my friend will buy me a pizza.
So be sure to click the subscribe button below to get a weekly “Notes from The Lab”, part of Espresso, sent to your email.
The Chart
After returning home from the beach on Monday I overheard JLabs’ resident weatherman, FM (a Junior Quant) showing the team a chart and explaining how it was registering a rare “big wave coming soon” signal.
The chart he shared is below. It has Bitcoin’s price (top graph) with it’s Parkinson volatility score at the bottom.
I won’t bore you with the exact formula for Parkinson volatility, all we need to know is it measures the rate of price change over time.
When this score is dangerously high (over 70/100) it registers one of the red bars you see above. Red indicates price is likely to slow down and consolidate for a bit.
When this score is dangerously low (below 10/100) it registers one of the green bars. Green indicates extreme price movement is likely.
The same way Bodhi uses his data maps to find when big waves are coming, we use the green lines on this chart to find when big BTC price moves are coming.
And as you can see looking at the chart above there has been a big green storm brewing off BTC’s shore since late August.
Pure Signal
Taking an isolated look at the chart below we see this “big wave incoming” signal as historically rare and potent.
The first time we saw this was in November 2020, just as BTC was preparing to run from $12k and break past the $14k resistance level for the first time in nearly 3 years.
Less than 2 months later BTC mania swept global markets and price rose 3.5x, to over 40k by January.
With Parkinson score rising from less than 1 to over 70.
Shortly after, the waves were gone.
Then as you likely remember we spent the remainder of 2021 in a high volatility environment. Every Elon tweet and SNL appearance set the market off its trend.
It wasn’t until early this year, in January 2022, when we received our next green storm warning.
This time it arrived at $44k.
In short order price drove down over 20% in just a matter of days. It was the first of Bitcoin’s many crashes this year.
That was followed up by another green flash in late March as BTC encroached on $48k, the peak of its bear market rally.
That signal was a precursor to the storm that culminated in the death spirals of Luna, 3AC, Celsius, and others.
A few weeks later price was trading below $30k, en route to sub $20k.
Which of course brings us to the storm warning we’re receiving right now.
As we see below BTC’s parkinson score fell below 10 in late August has remained in this dangerously low range ever since. Registering low scores between 5-10 out of 100 depending on the day.
As we see from the previous examples, price has never dwelled in this extreme low volatility region for long.
It makes me wonder if past week’s price movement from 21k-18.5k weren’t the first rain drops of a hurricane that’s about to make landfall and send BTC to new year to date lows.
Or if that was simply the final shakeout before a major upside recovery.
A lot of the charts I’ve shared with you guys over the past month like: Stablecoin dominance, Open Interest ratio, and MVRV all seem to hint at the latter being most likely, but given what we’ve experienced so far in 2022 extreme caution is a must.
One things for sure: as long as this green bar is flashing we shouldn’t expect price to remain in this range for too much longer.
Trade safe and have a plan for major moves in either direction.
Just as my new friend Bodhi likes to say farewell…
“Vaya Con Dios”.
Sincerely,
JJ
P.S. - What do you guys think? Let me know on twitter @JLabsJanitor or leave a comment below!
Would have loved to have you digging deeper in the math/timeframe over which you computed the Parkinson index
Thanks JJ, great analogy! Given the macro backdrop driven by the Fed raising rates further and the USD’s rise (suppressing asset prices), I wonder if further downside in crypto is inevitable. I hope I’m wrong… but the Fed is the puppeteer.