Earnings season is coming quick – here’s how to use VWAP to find price targets
Dear Reader,
Every idea, let it be validated by VWAP, and you’ll never be on the wrong side of a trade ever again.
I want to take an example from last earnings season – I’m taking this example from July, when Netflix (NFLX) reported earnings – to highlight my point here.
When NFLX reported earnings on July 20, the stock was gaped up headed into the next day’s trading session.
Which, for us, meant one thing – look to play the fade, or a trade to the short side.
Why?
Because the stock was high above VWAP, and the downside play was a VWAP reversal.
Or the trade that continues to WORK.
You can see how the stock was gapped up below.
This is using prices of significance to create a series of if/then statements.
If the price does X, then Y.
Or if the price does A, then B.
On every earnings report, I lay out these levels and if/then statements to both the upside and the downside.
In this case, NFLX was gapped up, so I was looking for the mean reversion trade back to VWAP…and perhaps even beyond.
Why beyond? Because multiday VWAP, or the orange line on my charts, was telling us so.
And shortly after the market opened, look what happened.
A short from the initial VWAP break of $215 in the premarket went all the way to the multiday VWAP of $202.50.
That’s a $12.50 per share move.
On a trade of just 100 shares of NFLX, that’s a profit of $1,250. Not a bad way to start the day.
But the real hay to be made might be on what I saw in the Invesco QQQ Trust (QQQ)…
NEW TO VWAP?
Start your journey down the path of trading salvation with a headfirst dive into the VWAP bible.
QQQ, YAHOO!
If you don’t already know, QQQ is my single favorite ETF to trade.
It’s an exchange-traded fund (ETF) of the top 100 stocks in the Nasdaq.
So it’s tech-heavy, but it basically is the market.
I think you could even trade just the QQQ all day around VWAP and be successful.
And on July 20, I saw something in the QQQ chart that made me bullish.
When stocks break out, I look at prior areas where they broke down from for potential reversals to the upside.
And look at what I found on this QQQ chart from yesterday.
If we can get through $302.50 to the upside, we’ll be in this consolidation mess from 5/24 – 6/6.
We actually punched above $302.50 that day.
The green arrow is at $310. If we break through the consolidation mess, $310 can only be inevitable.
Why? This is an area that the stock broke down from. But I needed some further confirmation.
So, I started looking at longer time frames of VWAP.
First I looked at one month of VWAP. For me, this is going to be the next major support level for QQQ to the downside.
And I’m a bear.
Then I looked at six months’ worth of data.
And this, my friends, is a kardashian bottom pattern developing on a longer term time frame.
But for price trading, we need to take note of prior price levels.
My price target of $310 is basically right in the middle.
That doesn’t mean that I’m going to run out and buy far dated call options on QQQ aiming for this level.
But until the market proves otherwise, I’ll remain optimistic that we can reclaim this level.
Notice what I said there.
Until the market proves otherwise.
I’ve been in this game long enough to know that things can change on a dime.
Why do you think I stay in cash?
But that doesn’t mean I’m waltzing in every day and starting from scratch.
I’m using the tools we have at our disposal – in this case multiday VWAP – to prepare for the market’s next move.
And using this tool, I’ve just determined near term downside support at $287.39 and an upside target of $310.
So, with a little bit of prep work, and using my powerful multiday VWAP, I’ll be facing no surprises.
Remember…
Every idea, let it be validated by VWAP, and you’ll never be on the wrong side of a trade ever again.
That’s all for now.
Comments
October 05 2022
Leave a Reply