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Here's how traders can use VWAP as the 'ultimate sentiment indicator': Brian Shannon

Yahoo Finance’s Jared Blikre sits down with Founder of AlphaTrends.net, Brian Shannon, as they discuss financial markets, trading, risk management, and stocks.

Video Transcript

- I mean, I kind of refer to it as ultimate sentiment indicator, Jared, for that reason that you just said. You can take any point on the chart and say, who's in control from that very point there? So for instance, yesterday, we saw the CPI report. And you put in anchored volume weighted average price to the beginning of the trading that day.

We got hit hard, it rallied up, touched that volume weighted average price midday yesterday, and then dropped hard from it in the NASDAQ. This morning, we saw a rally of right up to the volume weighted average price from yesterday's CPI. And again, we fell away from that.

So it tells us factually who's in control from any point in time. The best way that people really can understand what a volume weighted average price is, it's a mouthful, but it's really a dollar cost average. What's the average price the business was transacted at from a certain point?

It's not time-based like a traditional moving average, but it is cumulative moving forward from that point. And it accumulates, it averages out from there. So you invest $1,000 per month in Apple at the beginning of the year, at the end of the year, you've made 12 purchases.

One month, you might have purchased eight shares. Another month, you might have purchased five shares. But what's your dollar cost average? That's what the government is interested in when you go to sell it-- what did you pay for this?

And that's your anchor point. You're anchored to your price. The market is anchored to that key event, be it the CPI or, as you pointed out, earnings reports, important highs and lows, year-to-date volume weighted average price, month-to-date.

I mean, you can go really deep into it, like I have. Or you can just use it as a basis of who's in control from the beginning of the year, how does price move around that level. Are buyers defending it or are sellers coming and getting aggressive as it approaches that level from underneath?