In late December and early January, the first AVWAP (green) showed repeated Support (green arrows) for the stock. The AVWAP from the 2nd earnings report (red) showed strong Resistance (red arrows) and it resulted in the stock getting pinched. We would monitor this stock for a potential upside break. Chart 5.7 shows that a break in the direction is not assured. Point (3) shows how the price broke lower than the longer upward trend (the first AVWAP in green). Chart 5.7 uses the same stock as Chart 5.6. This time, we see the result of trading after a third earnings report (3) was issued. This was a genuine surprise to the market, as the stock failed miserably after that report.

Notice how the stock continued lower for the next month after the earnings report (4). There are three lessons here. One, do not purchase a stock while it is in the trendless period of a Pinch. Two, new purchases of a stock before earnings releases can be perilous. Three, there is no rush to buy stocks that might appear to be a value after a large selloff. Chart 5.7 Not all pinches will be resolved in the direction of the primary trend. Chart: TC2000.com Market Psychology: How Committed Are Buyers and Sellers? If prices move quickly and have larger than normal volume levels, it can show us there may be traders and investors from different timeframes competing for the available supply (upside breaks). This behavior is known as a range break. An opportunity to buy after a pull back might not present itself for several days. The speed of a range break can reveal how motivated one side is and may change your entry technique.

This can be especially true of stocks that break out when they are accompanied by a fundamental event, such as an earnings report. The stock in Chart 5.8 came out of its Pinch with a small gap (7). As always, the concepts and setups discussed occur in all timeframes. Chart 5.8 is constructed of 1-minute candles for the first 50 minutes of this day. Anchor (1) occurred at the start of the day after the stock gapped significantly higher from the previous day close. Initially, buyers held control of the stock, but then it broke below the daily VWAP (red) (2). A day trader could start a short position with a stop above the high of the day (3). After the initial bounce, the stock found Resistance at the daily VWAP (4 and 5) and stops could be lowered to just above these short-term peaks. A new AVWAP (green) was anchored to the new lower-low (6). The selling sped up (7) as the stock gapped below the AVWAP from (6).

Longer-term traders may look at this and not see the value of trading on a 1-minute chart, but shorter-term traders could have the opportunity to profit from more than a 2-point decline in less than an hour. Chart 5.8 A 1-minute chart. The gap (7) shows a more motivated group of sellers. Chart: TC2000.com The Anchored VWAP Pinch is a setup that typically gives us plenty of time to anticipate the trade setup as the stock ping pongs between the two significant AVWAP levels. You may be tempted to enter the stock before it exits the Pinch and makes a higher-high (longs) or lower-low (shorts) but, as we saw with the preceding examples, an AVWAP Pinch is not a reason to buy or short the stock. We should enter the trade when the stock breaks out of the Pinch to participate in the emergent momentum. Of course no trade plan is complete without setting a stop after the entry to protect against catastrophic losses.