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How to chart anchored VWAP multiple time frames: Brian Shannon, CMT

Yahoo Finance’s Jared Blikre is joined by AlphaTrends.net Founder, Brian Shannon, CMT, as they discuss charting anchored VWAP.

Video Transcript

JARED BLIKRE: When I look at this longer term chart that goes back a couple of years, it reminds me of the NASDAQ, what we were just looking at, in a certain way, except we've broken above this critical threshold right here, the red line, the potential resistance. Now maybe potential for support. Definitely a level of interest, I would say.

BRIAN SHANNON: Definitely a level of interest. And, Jared, the thing here is, the stock peaked at about 80. Nobody knew it was the high at that point, right? After it broke down to about 65, 70, we can look at that and say, that was an important high. That's when we set that anchor, because we realized that was an important high. So we want to start to measure sentiment against that. And as the stock drops over the next six months, down to as low as $30 per share, that was the vicious part of the bear market. That was the part where they scared people out.

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Then from about May of last year, up till just the beginning of February, they wore people out. It's the transition of balance of power that the buyer-- the V bottoms, they seemed like they occur. So it seemed like a V bottom in May. But there was no follow-through there. Now we have a much more solid base here that the prior resistance seems to be holding the support. The stock was up on big volume a couple of weeks ago related to an earnings report.

So we want to say the sentiment shifted there. There was a big disruption in the supply and demand, which caused that gap on big volume. So that's when we take a look at the shorter term time frame to look for trend alignment, which, of course, was the first book I wrote. So in here, you've got-- looks like a 15-minute, maybe a 10-minute time frame.

So that first red-- or the second anchored VWAP is anchored to that event. And what you want to do is measure the sentiment, the psychology, who's in control, from a particular event. What we often see is the buyers will gain control that first couple of days or two, and then we'll start to see that battle. And now the sellers have regained control in here for now, and it's below that anchored volume weighted average price from the earnings.

That tells me with 100% certainty the average long participant who bought after earnings the average is losing money because the average price is $44.46, and here we are at $42.85. It's not a huge loss, but it tells me I don't want to buy yet. I want to buy when the buyers regain control of that shorter term trend and put it in alignment with that bigger picture trend, especially when we're in this shaky environment. The blue line that it's interestingly holding, that's the year to date anchored volume weighted average price.

JARED BLIKRE: Yes.

BRIAN SHANNON: And that is always a measurement that you want to keep an eye on because that's how institutions are often benchmarks for their performance. And what you can see is the stock is tightening up. It's pinching in between those two anchored volume weighted average price levels. So as the range gets tighter, we want to see some higher lows. And then if it can break above that prior high at about $45 per share, that tells me the buyers will be in control. And then my worst case stop would go underneath the recent low, just underneath the previous one back, right there.

Because if we buy the short-term higher high in anticipation that it's going to be in alignment with the bigger picture time frame, well, I don't want to set my stop 7% away, 8% away, 4% away. I want to base my stop on the definition of trend. The definition of uptrend is higher highs and higher lows. So if I buy that higher high above the flat to rising anchored volume weighted average price, my stop will go underneath the most recent and relevant higher low. That would be right there. So if it breaks back down, the definition of trend is no longer existent. I have no reason to continue to hold the stock.