I teach technical analysis at the New York Institute of Finance. NYIF was founded by the New York Stock Exchange in 1922. Its purpose is to educate market professionals. It’s “where Wall Street goes to school.”
I’m often asked at NYIF events if technical analysis really works. This question comes from market professionals.
Many use tools like RSI with default settings or a 200-day moving average (MA). They can’t find a way to make money with these ideas.
They’re right that popular tools won’t often be useful. That’s for the simple reason that too many people use them.
On the other hand, more obscure indicators can be powerful. Today, I want to show you some of my favorites.
The chart below is an example.
It’s a chart of the SPDR S&P 500 ETF (SPY) with popular moving averages (the 50- and 200-day MAs) and the volume weighted average price, or VWAP.
(Click here to view larger image.)
The 50-day MA warned of the recent decline, when SPY broke through it twice over a period of several days. It also flashed three other buy signals in the past 90 days.
The 200-day MA also gave a sell signal as SPY sold off. That signal seems to have come one day before the bottom.
This chart is an excellent example of why standard indicators aren’t profitable on their own. Selling on the 50-day MA breaks and buying back on the reclaims wouldn’t have given you much edge. Really, it would just frustrate you. And selling on the 200-day MA break would’ve had you selling when most of the damage was already done.
VWAP, on the other hand, did tell us quite a bit about the recent market action.
Get an Edge With VWAP
This indicator is widely used by market professionals on a short-term basis. When entering or exiting a position, pros check their fill price against VWAP. They want to buy less than the daily VWAP and sell for a few cents more than VWAP. In this way, it’s an indicator of how the trader performed.
While VWAP is generally a short-term tool, in the chart, I’m using VWAP as a long-term indicator. When using the VWAP this way, it’s important to “anchor” it to a specific price level. It’s still a measure of the market’s performance over a more specific period. We are just looking at the performance over the entire fourth quarter rally rather than a single day.
This chart takes a longer-term view. The daily VWAP is anchored to the October low. With this, it now serves as a proxy for the average cost of new positions in the most recent uptrend.
As long as SPY is above VWAP, the average trader shows a gain. SPY was above VWAP almost continuously for the past four months.
But that changed last month. At the low in January, SPY was 9.1% below VWAP. This marked the first time that new traders were facing significant losses.
In World War II, an Army Chaplain allegedly said, “there are no atheists in foxholes.” Historians can’t prove anyone actually said that, but it’s a phrase commonly used to mean that battle brings out a religious nature in those at the center of the action.
Likewise, in a market decline, even experienced traders turn to prayer at times like these. And the traders’ prayer is “please just let me break even on this trade.”
When traders had a chance to break even last Wednesday, many sold. The high that day coincided with the VWAP. A wave of selling on Friday seems likely to have been the last wave of selling associated with that group of traders. They were the ones who missed the breakeven level but couldn’t stand the risk of holding any longer.
While we should expect to see the next rally push through VWAP, I’ll be watching that level closely this week. It could prompt a new wave of selling.
I’d suggest charting with the VWAP to get an edge over traders. Find anchor points that correspond to the short- and medium-term trends, and trade it as the price approaches it from either direction. You may find it more useful than the traditional MAs.
Regards,Michael Carr, CMT, CFTe Editor, One Trade
Chart of the Day:Bitcoin Trend Change in the Works
(Click here to view larger image.)
Finally, an encouraging sign for crypto investors…
The past few weeks, I’ve been showing you how to read uptrends and downtrends with Heikin-Ashi candles. As a quick refresher:
- Uptrends are characterized by green candles with long upper wicks and no lower wicks.
- Downtrends are characterized by red candles with long lower wicks and no upper wicks.
- Trends change when we see a candle with long upper AND lower wicks, which is then confirmed by a candle opposite the previous trend.
I don’t know about you… but the bitcoin chart sure looks like it’s about to confirm a trend change.
Last week’s Heikin-Ashi candle closed with contention — exactly what we want to see. And so far this week, we’re seeing a green candle with a long upper wick and no lower wick.
There are still 5 and a half days until this candle closes. We want to see this same structure by the end of the week to confirm a trend change is in place. If that happens, you want to be long bitcoin and other cryptoassets.
Call options on the ProShares Bitcoin Strategy ETF (BITO) dated out several months could be a prudent play here.
Regards,Mike Merson Managing Editor, True Options Masters