The Low Historical Volatility aspect of the signal originally comes from the work of Larry Connors. It compares volatility measured over the last 6 days to volatility measured over the last 100 days. If the 6 day reading is less than half the 100 day reading, a Low Historical Volatility signal is fired. The NR7 aspect tells us that yesterday's range was the narrowest of the last seven days. If the market were thought of as a spring gradually being compressed, these signals represent a likely trigger point for releasing that pressure. There is potential for the market to break out of this tight range today, and essentially trend in one primary direction.

A good clue as to if and which direction it might break can be determined by today's market action near yesterday's 110-14 high and 109-22 low levels. A break of either is a likely indication of the new trend direction out of this contraction period. An aggressive trader can enter on the break. A conservative trader might want to wait until a return to the breakout level, which often happens before a sustained move begins.

Some initial clues to breakout direction can often come from early rejections of these levels. If the high is approached, repelled, and price then moves through the DP, the likely breakout direction is the low. Likewise, if the low is approached, repelled, and price goes through the DP from below, the likely breakout direction is the high. Another clue can often be found in price action near the DP. If price is unable to move through this level, the likely breakout direction will be the same side as it originated.

Chart created by Tradestation.

On the T-Bond Half Day chart, all three of our Cycle Indicators moved higher into overbought territory with yesterday's activity. This does not necessarily mean that we should expect them to soon turn. If short term cyclical patterns have returned to normal behavior, we should see a period of topping action develop before they launch their next cycle lower. Our first clue will come from a downturn in the 7 period %K. A turn of this indicator from its overbought or oversold zone is usually a good indication that a new trend has begun and at least several more bars of new short term direction should follow.

Economic reports on today's agenda include State Unemployment Initial Claims at 7:30CT, Leading Economic Indicators at 9:00CT, and the Philadelphia Fed Index at 11:00CT.

The ADX level on the 5 minute chart is above a value of 30 (see ADX charts below), indicating that the trend to lower prices is still intact in this timeframe. If we were triggered into a short position by a price reversal pattern and/or Oscillator Divergence near the 5 minute 20EMA, we would have the makings of a Holy Grail setup. A trade based in part on a Holy Grail pattern can take as its minimum profit target a return to the most recent swing pivot extreme, which would be yesterday's 109-22 low. If the move to that level can occur on Momentum Confirmation, there should be even more downside in the making.

The Historical Volatility chart at the top of this commentary is a daily of the March contract with two slightly different ways of measuring volatility levels. The bars colored in red are either NR4 or NR7 days. As is evident from the chart, Narrow Range Days are typically precursors to sharp moves. The Historical Volatility indicator has dropped to very low levels. As a result, there is good potential for the development of large, sharp moves. Stay on your toes, and once this market breaks, make sure that you're on the right side.