Here’s how we use VWAP moving averages to keep us in strong stocks. Check out CBOE and CME. (September 08, 2017)


I want to look at CBOE ( NASDAQ:CBOE ) here, and this is why: The stock is overextended, it is kind of accelerating, it looks like it is really starting to take off. You can’t really call this a parabolic move. A week ago it was at 100.00, now it is 4 percent higher. Not exactly a huge move.

What I want to do is just study this for moneymaking purposes, to learn how to buy something and then hold it. Now, this is a hard money environment. It is really hard to make money because the market is kind of choppy, it is kind of toppy. We don’t know if it is toppy or if it is just kind of a consolidation on the way to higher prices. That is just the conundrum that you see market prognosticators embarrass themselves on a regular basis over. Everybody calls a top and then insists that the market is wrong. And then years later they say, “Well, I wasn’t wrong, I was just early. I’m broke, my clients are broke, but I was right, I was just early.” So, as long as the market continues to go higher you want to stay long. You don’t necessarily need to be a buyer but you at least want to stay long.

What we need to do is, look at stocks and see the difference between those that we just kind of want to be taking some quick profits on and those that we want to allow run. Now, this green dashed line here is the 30-period moving average of the volume weighted average (VWAP) price. In other words, it is a 30-day moving average; only it is not a moving average of the closing price of the stock. It is a moving average of the prices of this stock based on what their volume is on that particular day. So, a move where there is really, really high volume is going to have more credence to the data than a move to really, really low volume.

The bottom line is, you can see that this is moving up. It is starting to accelerate, which is exactly what we want to see. But here is the kicker: We want to see this in a stock that we already own, and so let’s look at the time to really be buying this. The last time that I would look to see this as a stock that gave you a pretty good entry was right here when the stock broke out, not really above 80.00 but above 82.00, 83.00, whatever it was right here. That was a breakout from consolidation. The moving averages were all lined up. Prices above the 50, which is the red one. The 50-day moving average is above the 100, which is whatever color you want to call that. The 150-day moving average is down here. And then finally the 200 here. So, there is a real bullish hierarchy of moving averages clear down here and then the stock just continues to go.

Your technique for this stuff is, use something like the 30-day moving VWAP as a reference. You don’t have to use the 50-day moving average. That is a pretty popular indicator but if you are doing something like this, this is going to keep you in the stock. It is going to keep you in the stock a lot easier than if you are really kind of zooming in here trying to trade every single wiggle like, “Oh! It’s a big down day here! Oh my gosh! I have got to sell, that is distribution.” No! The trend is still up. Everything looks good.

From here, I couldn’t buy CBOE ( NASDAQ:CBOE ) right now because it is too extended. But I have got to tell you, if I am long the stock, what I would wind up doing, just as a nod to the gods of Wall Street, I would probably take a little bit of profits, a little bit to lower my cost basis from wherever this was, and then go back to using the VWAP here. As long as the stock is staying above here I have got to hang with it because it is difficult to find a stock that is going to replace this. The stock is working in your portfolio, you let it work. And so to apply that to somebody else in this industry, first of all, you look at where this was trading here, You can see where the VWAP was kind of trading sideways; the stock was kind of drifting back and forth within it.

If we look at CME ( NASDAQ:CME ) you can see the stock doing that now. It is chopping around. It is just ugly. But, if CME ( NASDAQ:CME ) starts moving higher then you could very well see, in the VWAP here, a similar kind of thing, where the stock starts moving higher. And so you would use the VWAP here as a reference for stops. As a reference of where you should be selling or buying more on CME ( NASDAQ:CME ). It hasn’t happened yet but this is your action plan for a stock like this. We can’t go back and make that money on CBOE ( NASDAQ:CBOE ) but we can learn the lesson and apply it to a stock like CME ( NASDAQ:CME ).

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