ES and VWAP

Late in the seeion yesterday I suspected ES would break below VWAP (Volume Weighted Average Price) and VWAP is an interesting indicator because it is one of only a handful of indicators Wall Street uses, primarily to determine the performance of a market maker/specialist's performance in filling a large trade. The middle men, market makers on the NASDAQ and Specialists on the NYSE (The typical image of guys on the floor screaming out orders) represent about 30% of the trade in any given stock for their own accounts, they have many advantages we don't such as naked short selling, but they are also bound by rules for those advantages, such as they MUST fill a market order if they can't find a match for your order, even if you place a sell order in a cratering market, they must buy from you (which is the last thing they want to do, buy inventory in a market that is falling sharply), so they influence intraday trade more then you may realize, although High Frequency Trading is overtaking them. They also will hold stock or sell short, depending on which way they see the market going as they have a full view of the market order book (well beyond what you see in level 2). Many times when we see small 1 min 3C divergences, it is simply a market maker/specialist, accumulating stock for an intraday move which they may sell later, all the small trades, the difference they make on the bid/ask spread and volume rebates they receive, all add up to a nice chunk of change.

However, a lot of intraday trade you see is misleading as the middlemen work to fill large orders, typically at VWAP. For example, a sell order may come in, they want to sell this large order in smaller chunks as to not drive price down against them, when price does go down against them, they will "work the bid/ask" increasing it, they will flash bogus big block orders that get traders to think a large buyer is coming in to the market and then pull the order, all of this to drive price back up to VWAP so they can sell the next small chunk and on and on it goes until they finish filling the order. Morning trade can be especially deceitful as they can take advantage of limit orders and stops set by part time traders who have to head off to work.

Any way, I've had problems capturing the ES chart today, but I finally got the VWAP for today thus far.

VWAP is in pink, the other two lines around it are 2 standard deviations above or below VWAP. It's interesting just to note the activity, the candles and momentum at different areas. For example, in pre-market (lighter shade to the left) WVAP is hit and sell orders drive price down two standard deviations, we see a hammer candle and the next move toward VWAP begins. On the open the red series of red candles move price below VWAP, remember the early 3C 1 min positive divergence near the open?  That accumulation drove ES up 2 standard deviations (if they are selling a large order, selling up here is much more desirable), but again ES breaks through VWAP on a strong series of red candles that are pretty large bodied. VWAP acts as resistance and price moves again to the lower channel at which it finds some support, again the support can be created by the many tactics the middle men use, flashing big block buy orders and pulling them, etc. Since I captured this, as I was going to say there will likely be another move to VWAP, there has been, but it fell short. This is a huge difference from yesterday's market in which trade remained above the VWAP almost all day until the final 30 minutes or so when the pros come out.

Here's yesterday, you may want to look at last night's post and the breadth indications and other indications that led me to believe that VWAP would be broken yesterday.

Yesterday's market and the close below VWAP.

When I have some time over the weekend, I'll try to discuss some of the HFT trading tactics, such as "pinging for icebergs".

They are all just pieces of the puzzle.