Thursday, August 07, 2014

Gauging the Market's Intraday Strength and Weakness With VWAP

The volume-weighted average price for a stock or index (VWAP) is a useful statistic for market makers and intraday traders, as it provides a benchmark for current market price.  In a strong market, a stock or index will consistently trade above its VWAP and VWAP will have a rising slope.  In a weak market, we see the opposite.  In non-trending markets, it's not at all unusual to see a stock or index oscillate around its VWAP.

If you click on the chart above, you'll see a different application of VWAP.  Here we're looking at SPY on a five-minute basis through the day session for 8/7/2014 (blue line).  The red line represents the percentage of NYSE stocks trading above their day's VWAP.  The green line represents the percentage of Dow Jones Industrial Stocks trading above their day's VWAP.  (Data come from the e-Signal platform).

Generally, in an uptrend, we'll see more than 50% of stocks trading above their VWAPs.  In a downtrend, such as we had in today's market, we will get persistent readings below 50%.  More rangebound markets will tend to oscillate around that 50%-ish level, often reflecting a degree of sector rotation.

By comparing the percentage of NYSE stocks trading above their VWAP with the percentage of Dow stocks trading above their VWAP we can get a sense for how the broad market is trading relative to the large caps.  From relatively early in the session, we can see that large caps were weaker than the broad market.  That is useful information if you're structuring a short trade or a relative one.

The main value of the VWAP figures for the active trader is to help them stay on the right side of the market.  Even when we bounced during the afternoon yesterday, the vast majority of shares stayed below their average prices.  When VWAPs are declining and stock prices are staying below those even on bounces, that's a pretty good indication of weakness on the day timeframe.

Further Reading:  The NYSE TICK Environment