Vwap as Trend Indicator
Updated
The volume weighted average price, followed by most professional floor trader types, can be used in many ways. It is often a pullback level; after gap openings it is often a place that a retracement will, at some point that day or the next, retrace to. But I find it is a good simple trend indicator. Look at the chart here from 30 Jan to Feb 1.
You have the market seriously selling down well under the Collective MA, which is a clear short-term downtrend (short-term in this time frame which just happens to be 30 mins). But also we have
a) a bullish-colored cloud - in my templates yellow is bullish, blue is bearish.
b) a bullish chart background which is coloured by vwap being up or down two or more bars in a row. (When it is wobbling around, the background in this template goes to black.)
Once the vwap trend turned up (after a couple of hours or so), this was the side to be on even though the market is still down using most typical trend indicators.
Then on Feb 1st, you have a gap up open (this entire period on the chart if you zoom out to the daily is basically a sideways chop for a week or more) but the vwap trend is down and sure enough it is a down day.
This is published on Sunday. Note the vwap level at end of Thursday Feb 3 around 134.80. Friday was gap up and steady uptrend above bullish cloud. But expect the market on Monday or later to come back down to that 135 level, which also happens to be where the Ichimoku cloud is now. The clouds are bullish so the move could continue (but in recent sideways action that doesn't mean too much) but still. You can see to the left how the other gaps got filled at some point. This one probably will too. So if we get another gap up open on Monday and the vwap trend turns bearish soon thereafter, I would feel confident favoring the short side even though a bullish Collective MA above bull clouds. Also note how there is a flat bottom to the cloud. A flat bottom or top indicates an important level to pay attention to, which often acts as a magnet. More reason to anticipate a return to that 135 level. If you day-trade options, a put on the S&P might do nicely here.
Or, if the Collective MA throws off a bear signal in bull market (price closes below the lower blue band underneath the green collective MA (combined 5,9,13,21,34,55,89 SMA's), then even though it's not a great setup (as would be a Collective MA sell signal underneath a bearish cloud for example), because of the vwap trend and the gap from Thursday, there is more reason to favour the short side.
But if the market gaps up above current bull clouds and vwap stays bullish (like Friday basically), then stay long. Plenty of time to go short once one or more basic indications demonstrate that a turn has taken place. Don't fight the tape!
Indicators:
The vwap is the magenta dotted line
The Collective MA Band is the one with yellow upper band, green price line and blue lower band
The Ichimoku Clouds are the strange-shaped things formed from two different calculations based on Donchian channels and projected 26 bars out to forecast likely future support and resistance and/or if/when the market is way above or below them, provides a visual context highlighting the strength of what is surely a trend move at that point. Look at where the opening bar on Feb 1st went up to - an early high point of the bullish cloud which was its anticipated high point of overhead resistance. It got the timing wrong but the level right. This often happens.
You have the market seriously selling down well under the Collective MA, which is a clear short-term downtrend (short-term in this time frame which just happens to be 30 mins). But also we have
a) a bullish-colored cloud - in my templates yellow is bullish, blue is bearish.
b) a bullish chart background which is coloured by vwap being up or down two or more bars in a row. (When it is wobbling around, the background in this template goes to black.)
Once the vwap trend turned up (after a couple of hours or so), this was the side to be on even though the market is still down using most typical trend indicators.
Then on Feb 1st, you have a gap up open (this entire period on the chart if you zoom out to the daily is basically a sideways chop for a week or more) but the vwap trend is down and sure enough it is a down day.
This is published on Sunday. Note the vwap level at end of Thursday Feb 3 around 134.80. Friday was gap up and steady uptrend above bullish cloud. But expect the market on Monday or later to come back down to that 135 level, which also happens to be where the Ichimoku cloud is now. The clouds are bullish so the move could continue (but in recent sideways action that doesn't mean too much) but still. You can see to the left how the other gaps got filled at some point. This one probably will too. So if we get another gap up open on Monday and the vwap trend turns bearish soon thereafter, I would feel confident favoring the short side even though a bullish Collective MA above bull clouds. Also note how there is a flat bottom to the cloud. A flat bottom or top indicates an important level to pay attention to, which often acts as a magnet. More reason to anticipate a return to that 135 level. If you day-trade options, a put on the S&P might do nicely here.
Or, if the Collective MA throws off a bear signal in bull market (price closes below the lower blue band underneath the green collective MA (combined 5,9,13,21,34,55,89 SMA's), then even though it's not a great setup (as would be a Collective MA sell signal underneath a bearish cloud for example), because of the vwap trend and the gap from Thursday, there is more reason to favour the short side.
But if the market gaps up above current bull clouds and vwap stays bullish (like Friday basically), then stay long. Plenty of time to go short once one or more basic indications demonstrate that a turn has taken place. Don't fight the tape!
Indicators:
The vwap is the magenta dotted line
The Collective MA Band is the one with yellow upper band, green price line and blue lower band
The Ichimoku Clouds are the strange-shaped things formed from two different calculations based on Donchian channels and projected 26 bars out to forecast likely future support and resistance and/or if/when the market is way above or below them, provides a visual context highlighting the strength of what is surely a trend move at that point. Look at where the opening bar on Feb 1st went up to - an early high point of the bullish cloud which was its anticipated high point of overhead resistance. It got the timing wrong but the level right. This often happens.
Note
Btw, one neat feature of this trend indicator is that the vwap price remains the same in any time-frame (unlike moving averages). Which means that the trend in the 5 minute is usually the same as the trend in the hourly. Well, not always: sometimes there might be a short-term wobble in the 3 minute chart that doesn't happen on the one hour chart, but that doesn't often happen except during choppy no-trend days.
In any case, even if the trend is always exactly the same in the different time-frames, the price level of the vwap is, which is something to be aware of and appreciate.
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