michaelsincere.com VWAP responses to volume more than the price

http://newsletter.neoticker.com/2006/06/25/vwap-based-pivots/ Jun 25VWAP Based Pivots by Lawrence Chan on Jun. 25th, 2006 in Indicator Library Volume Weighted Average Price (VWAP) is widely used by many traders as a reference tool to gauge the market condition. It is also an important tool for traders who execute orders from clients with large blocks. Due to its common usage, VWAP is a very useful indicator for day traders. The odd thing is that not many technical analysis articles talk about VWAP based indicators at all. I will present a few interesting ones here. What Is Volume Weighted Average Price? As oppose to normal moving averages that depend on the price series alone, volume weighted average price usually takes the weighted average of a price series together with the corresponding volume series, from a fixed starting point like the beginning of the day (i.e. a current day VWAP), or the start of a year (i.e. the current year VWAP). Thus VWAP responses to volume more than the price itself. If the market is trading heavily at a particular price, than the VWAP will move towards that price very quickly. Volume Weighted Average Price Is Not A Single Price Point Due to variations in data sampling techniques, there are many ways to calculate the VWAP, even with the same basic rules (e.g. start accumulation from current day market open). The most obvious factor affecting the VWAP result is the resolution of the data being used. If you use tick data, then you get the most accurate VWAP as that is the highest possible resolution you can get. On the other hand, most traders do not have access to tick data, either limited by their software application or hardware capacity. Thus they will use data series like 1-min bar, 5-min bar, etc. to approximate the VWAP. For those who do not use tick data to compute the VWAP, remember that the VWAP based on your sampling technique is no longer an exact price, but an approximation. The precise value for the VWAP will lies somewhere between the extreme points of your sampling data. Thus, you can figure out the highest and lowest possible value for your VWAP by using the high or low price of your data series to figure out the VWAP price band. Putting It Together Into Indicators Here is a chart with the indicators I have created. CurrDVWAPBand is an indicator that calculate the price band of VWAP using high, low and close of the underlying data series. The chart speaks for itself that the band is significant as an important real-time support resistance tool. PrevDVWAP is an indicator that simply return the previous day final VWAP value as a pivot point. It is an example showing how you can use the indicator formula to construct support resistance type indicators. CurrDVWAP is not shown in the chart, but included in this article anyway as it is a simple version of the indicator CurrDVWAPBand. Have a good fall Commentary: Market indicators point to new dangers View all Outside the Box › ‹ Previous Column Who's next in the tech M&A frenzy Latest Column › Fiscal ammunition runs low Story Quotes Comments Screener (91) Alert Email Print ShareBy Michael Sincere and Pascal Willain BOCA RATON, Fla. (MarketWatch) -- At this time, the technical indicators point to an extremely dangerous market. No one seems happy. The bears are frustrated that the market hasn't confirmed their worst fears. The bulls are not convinced the worst is behind them. Looking at the moving averages, the Standard & Poor's 500 /quotes/comstock/21z!i1:inx (SPX 1,065, +17.37, +1.66%) has dropped firmly below the 200-day moving average and the 100-day MA. We're now waiting to see how it reacts to the 50-day MA. In addition, MACD crossed below the 9-period signal line using the default setting of (12,26, 9). As this is written, MACD is close to dropping below the zero line, a highly bearish sign. Doomsday investingInvestor Peter Schiff invests as if the U.S. economy will collapse, which involves moving money offshore, a move he calls the most patriotic way for an American to invest. Dow Jones Newswires' Meena Thiruvengadam reports on a man who has become a financial fortune teller for Tea Party activists and who predicts an evisceration of the American dream. In the chart below, most of the largest volume bars are red, indicating that sellers have been in control. But the selling strength is decreasing. Since many new buyers are not entering, the market is somewhat directionless. We can also see that the market is bouncing around the 200 MA and 50 MA, but that it often exceeds these levels before reversing. You may have noticed that since May, large volume days have in general been down days, which could be a sign of distribution. Source: Stockcharts.com Using our proprietary indicator, Effective Volume, we have also found that large institutions are wary of committing a lot of capital to the funds as well. At this time, the indicator is pointing down. Also, it appears major institutional funds have lowered their exposure to the markets and have hedged their position. For example, the CBOE implied correlation index (http://www.cboe.com/micro/impliedcorrelation) increases at times of market stress as all the equities move together in a bear market. The index appears to show that institutional investors are prepared for a possible bear market. Sentiment surveys Although not recommended as a timing mechanism, surveys such as Investors Intelligence or the American Association of Individual Investors (AAII) tell you what the crowds are thinking. Often, the crowd is right for a while, but often misses the tops and bottoms. Therefore, when sentiment surveys are wildly bullish or bearish, it's a signal you may want to do the opposite. At the moment, sentiment surveys are not at extremes, but are showing a slight bearish sentiment. It's also been reported that ornery investors are pulling out of stocks and pouring money into bonds. From a contrarian standpoint, this is a very positive development for stocks. Not surprisingly, a number of pros believe that bonds are the next to blow. No wonder so many people are confused! Wrap around the VWAP Another way to look at the market direction is to analyze whether buyers or sellers have been in control. To do this, we use an indicator called VWAP (Volume Weighted Average Price) anchored at the April top (in blue) or at the July bottom (in red). VWAP is a measure of the average price of transactions through one trading day (1-day VWAP) or a set number of days. The blue line is used to see if sellers that started selling the market at the top are still in control. The red line is used to see if buyers since the bottom are in control. As you see below, last week, the price moved below the buyers' control line. This break is important because it indicates that buyers will probably want to cut their losses, which could push the market further down. (VWAP can be found in numerous chart programs.) Source: Charts.monest.net Longs and shorts If you are long the stock market, it's suggested you tread cautiously. Instead of a mind-boggling crash, as some predict, or an explosive rally, as many hope, the cruelest cut of all would be what we have now: neither side has a definitive advantage. We also think that both VWAP anchored at the previous top and bottoms of the market, as well as the 50 MA and 200 MA, offer formidable resistance levels, which could be difficult to break. Our belief is that any reversal to these resistance lines will be sold into. Exception: In case there is a break of the resistance lines (above), the market could go much higher. In the short term, however, that doesn't seem likely. Michael Sincere ( www.michaelsincere.com ) is the author of Understanding Options (McGraw-Hill, 2006) and All About Market Indicators (McGraw-Hill, 2010). Pascal Willain is the author of Value in Time: Better Trading through Effective Volume (Wiley Trading, 2008) and owner of the website, www.effectivevolume.com .

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