Stocks & Commodities V. 28:7 (16-23, 55): An Anchored VWAP Channel For Congested Markets by Andrew Coles, PhD

An Anchored VWAP Channel For Congested Markets by Andrew Coles, PhD

This indicator combines channel and envelope methodologies to accurately identify price reversals.

Physicist Paul Levine based his Midas (market interpretation/data analysis system) approach to technical analysis on a mathematical modification of the volume weighted average price (Vwap). Behind this modification is a well-thought-out philosophy of what drives market prices. This philosophy can be reduced to five basic tenets:

1. The underlying order of price behavior is a fractal hierarchy of support and resistance levels.

2. This interplay between support and resistance is a coaction between accumulation and distribution.

3. This coaction, when considered quantitatively from raw price and volume data, reveals a mathematical symmetry between support and resistance.

4. This mathematical symmetry can be used to predict market tops and bottoms in advance.

5. Price and volume data — the volume weighted average price — subsequent to a reversal in trend, and thus to a major change in market (trader) sentiment, is key to this process of chart prediction.

THE PROBLEM

While there is no obvious flaw in the logic that binds these five principles, there is one weakness in the final tenet involving what follows the end of a trend and a significant change in market sentiment. In his lectures, Levine repeatedly identified the ends of trends with significant trend reversals. Yet this need not be the case; the end of a trend will more likely herald a resting phase in market activity.

Technicians describe resting phases as sideways moving (congested) markets defined by horizontal support and resistance boundaries. These phases are subdefined in terms of various patterns, the most common being flags, pennants, triangles, and rectangles. According to most observers, markets trend only 25% of the time. Consequently, the ends of trends — and the attendant change in trader sentiment — only lead to a genuine trend reversal in perhaps one in four chart patterns.