💵 Adapt. Anchor. Profit?

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That Bear Grylls cliché is perfect. Adapt. Improvise. Overcome. Very cheesy, but true. Innovate or die could be the trader's ultimate motto. Markets are dynamic by nature, constantly evolving and responding to new information and other inputs.

A trade or set-up that's been working well for some time can suddenly evaporate, or reverse without any warning.

If we think about it logically the longer that you can take money out of the market, then the more likely it is that your particular gravy train will come to an end.

After all “there ain't no such thing as a free lunch” in markets. Anyone remember Crypto staking pools?

When the gravy dries up you need to find another source of nourishment. Not that gravy's especially nourishing, but you get the point.

Ideally, you've been looking around for one while the sun was shining and you were making hay. If not, hopefully you banked enough to buy you some time to take a good look around, rather than jump on the first thing that catches your gaze.

However, if you have a good eye and what we might call an instinctive feel for these things you may spot an opportunity early, or at least before it becomes the talk of social media.

You are never likely to be the first to spot an interesting situation or setup. It's a competitive game and there are just too many traders and too much money looking for a home. Many of them will be better resourced than you, but you can still be early to something or perhaps spot some value in an approach that hasn’t been fully exploited.

With that concept in mind let me offer up this chart of the Nasdaq 100 March E-Mini futures. 👇

As you can see it’s a line chart of 6 months duration to which I have added some other data.

Firstly an uptrend line in bright blue. the line extends higher from early January tracking the 1000-point rise in the Nasdaq 100 between late December and early February.

That uptrend line has recently been broken as the market reconsiders its position in light of a stronger-than-expected January Non-Farm Payrolls number and the possibility of US interest rates staying high(er?) for longer.

CPI data in the US is due today, Tuesday 14th of Feb, and that will likely be the deciding piece of the “what happens next jigsaw”. If we see an upside surprise that might be a very unwelcome Valentine's Day present for the bulls.

If we see a significant upside surprise in the data then it could turn into a Saint Valentines Day massacre, which oddly enough took place in 1929, the same year of the infamous Wall Street crash.

Back to our chart... 👇

The eagle-eyed among you will have noted that there are three other lines. Each line tracks the Anchored VWAP for the price of the Nasdaq future over three separate timescales. The Anchored VWAP is simply the Volume-Weighted Average Price for the instrument from a specific date until the present day.

I have chosen three starting points: In magenta, we have the Anchored VWAP from 01-08-2022. In green, we have the period from October 17th, the start of the most recent rally in equity markets. In brown, the period from the 1st of December a little over three months ago.

What should be immediately clear is the gap between the current price and all three measures of VWAP.

In the case of the AVWAP from mid-October, it extends to almost 810 points. That's 6.5% of the index value.

Intuitively that feels wrong to me as it says that the recent rally in the index has taken place on low volume. If it was made on higher volumes it would have dragged the anchored VWAP calculations higher.

True the August and October measures are back-end weighted but that can't be said of the shorter-term average, measured from December, which is around 760 points below the current price.

Now at the moment, I don't have the empirical data to prove that the Nasdaq is getting ahead of itself, and is potentially in line for a significant correction.

Even if I did have that data, this could be the time when instead of correcting or reverting to the mean, the index continues to move further away from the anchored VWAP levels.

However, that isn't what my intuition is telling me. Nor is this phenomenon confined to futures as this chart of QQQ bears out.

We can also see a similar pattern in Nvidia (NVDA)...

And in the chart of Tesla (TSLA) below. Tesla is closer to its August Anchored VWAP than the other three examples but is trading $30 above the average from mid-October and was at one point last week another $15 above that.

My thoughts are that we can use the CPI release as a test bed to see how instruments in this position react to bad news (higher prices) if we see them.

Subject to confirmation, the use of periodic anchored VWAPs to judge overbought and oversold situations could prove very useful indeed.