The statement that stocks bottom panic from selling, after which a rebound is inevitable is effectively used by this analysis. One way of measuring this mechanism is to watch widening range between low and high prices every day. Overall, a progressively wider range, watched during a relatively short period of time, depicts that a bottom is close. Usually price peaks are reached in a slower tempo and are characterized by the price range narrowing.
This calculation of the trading range takes place over a certain time-period for defining if an issue is being "dumped" and is approaching a bottom or not. A rise in the volatility line over the reference line is a supposition to a valid bottom. In the same way, an indication of an inevitable peak would be a decrease in the volatility line below the reference line. As long as inconstancy is growing, a stock is not likely to reach the top. It is important to remember that this study should be used together with trend following analyses and momentum oscillators for precision and confirmation.
There are two ways to interpret this measure of inconstancy. The first method states that market peaks are usually followed by growing inconstancy and market bottoms are usually followed by decreased inconstancy. On the contrary, Mr. Chaikin's method states that decrease in volatility over a longer time period depicts a close peak (e.g. a mature bull market). In addition, a rise in the Volatility indicator over a short time period demonstrates that a bottom is close (e.g. a panic sell-off).