Monday, March 29, 2010

The Relevance of VWAP in a Range Market

The volume-weighted average price (VWAP; red line above) is an excellent reference point in range bound markets. In a good range trade, we'll tend to see a narrow value area (volume will be transacted within a narrow price band) and moves away from value will tend to return back to (and usually through) VWAP. In a true range trade, we'll also see little slope to VWAP, as we transact volume relatively evenly above and below that average price.

If you're playing for a range breakout, it often makes sense to track the distribution of NYSE TICK, Cumulative Delta, and intermarket themes. Often we'll see buying or selling unable to pierce VWAP prior to a breakout to the downside or upside. It's the inability of price to trade through VWAP that shows buying or selling drying up--and that emboldens traders to probe lower or higher value levels.