Thursday, December 29, 2016

A Unique Measure of Market Strength Utilizing VWAP

This is the fourth post in the series describing market indicators that I follow during the day.  (Here are posts one, two, and three).  Above we see a five-minute bar chart for the percentage of NYSE stocks trading above their volume weighted moving averages (VWAPs) for that day's trade.  The chart is taken from yesterday's market on 12/28/16 (raw data and chart from e-Signal).  

This is a quick and handy reference measure, as it helps differentiate trend days from range ones.  On trend days such as yesterday, the great majority of shares will stay above or below their respective VWAPs.  For instance, yesterday saw most stocks trading below their VWAPs early in the morning.  We had a bounce and tried to get over 50% of stocks trading above their average prices, but could not sustain that.  For the remainder of the day, the majority of stocks stayed beneath their average prices--a good tell for a downside trend day.

Conversely, on range days, we'll see sector rotation and a good number of stocks will trade above their VWAPs and a good number will trade below.  That keeps the overall measure around 50%.  A nice check on the statistic is looking at the sector ETFs and identifying how many are trading above and below their day's opening price.  When we have a trend day, the great majority of sectors will either be above their opening price or below.  On range days with sector rotation, we're more likely to see some sectors up from their open, others down.

Half the battle of daytrading is figuring out day structure as early in the session as possible.  The VWAP is a convenient measure of value as established over the course of the day's auction.  How we trade relative to that value criterion gives us a good sense for whether the market is sustaining strength or weakness or whether we have a mixed picture and likely range conditions.

Further Reading:  Using Breadth to Track Market Strength