Here’s how you know whether to buy or sell. Check out $CARA, $IQ and $DBX. (June 27, 2018)


I want to look at three stocks that were really pretty shortable. This is almost like a “that was then, this is now” thing, a little rear-view mirror stuff. I am going to show you some things that should help you in the future. I am talking specifically about VWAP, volume-weighted average price. Let’s look at volume-weighted average price here as it relates to Cara Therapeutics ( NASDAQ: CARA ), Dropbox ( NASDAQ: DBX ) and IQ ( NASDAQ: IQ ), which I will get to in just a second.

Here’s the deal: If we look at this stuff intraday the big orange line here is the average price weighted by volume. And so the more volume that is traded the more significance that price has on this indicator. So it is really important to understand how this works. The basic idea is this: If price is above the volume-weighted average price, just like a 50-day moving average for example; if a stock is running up and then kind of bouncing along that, every time it pulls back it runs up above the 50 again, that type thing, it is a typical trending stock situation. If a stock is doing that what is that telling us? It is telling us that there are buyers there and they are buying it at higher prices, so there is demand. You want to be long stocks that are up, say above their 50-day moving average or above their 20-day moving average.

Well, it is the same thing here on the volume-weighted average price, only this stuff is intraday. It is intraday stuff, you can find it on all your software, where what the volume-weighted average price is for a stock. The idea is this: A big trader, somebody who is working on a trading desk who has a big order to fill, their client looks at the volume-weighted average price. If they have told you to buy a boatload of shares and you say, “Okay at the end of the day we bought the shares at $20.00.” “Okay, thanks very much.” Then they look and they see that the volume-weighted average price was $19.00 the client is going to say, “What the heck are you doing? You bought me the stock at $20.00. Well, the average trading price for the day was $19.00? Guess what? You’re fired!”

The idea is that when stocks are under accumulation WHEN they are being bought they are going to be above the volume-weighted average price. Every time the stock pulls back TO that volume-weighted average price there is going to be buying there. IF the stock is under accumulation you are going to see buying there. Now, that doesn’t mean you absolutely will see buying there; I will put it a different way, I will kind of reverse engineer it. IF the stock continually rebounds off the volume-weighted average price the INDICATION is that it is under accumulation. So it is not the indicator that tells you what is happening. It is what is happening around the INDICATOR that tells you whether the stock is being bought or being sold. It is really important to understand that.

The idea on this volume-weighted average price indicator is this: If a stock is up above it, it means that the stock is being bought. On the other hand, if the stock is down BELOW it, it means the stock is being sold. So here on Cara Therapeutics ( NASDAQ: CARA ), the stock gaps up today. They got some good results on a pain relief medication that they have been developing. Pain relief is a good thing, particularly after abdominal surgery, so that is why the stock gapped up. At one point I think it was up over 30 percent, it was up 35 percent. First thing in the morning the stock gaps up. It doesn’t take too long for the volume-weighted average price to get up to that level because the stock is trading at such a high volume.

So the high volume plus the high price jerks this VWAP up to this level really fast. As long as the stock is above there you know that there are buyers. But hey, this thing is up almost 30 percent from where it opened up, it opened up at like 27-28 percent above the prior close. So you can’t be looking to buy that stock. You are just wondering if you could short it? As long as the stock is above the VWAP you don’t want to short that stock, because it is a biotech stock. This thing could go to the moon because again, it is biotech that is what they do. They move in really, really weird ways that don’t seem rational. This would be one of those days, right? Until the stock starts trading back below the VWAP that is when you know that this buying is DONE. Now you look at the stock, it was up here, now it is down here. You drag your cursor up here and you say, “Wow! This thing is still up 25 percent but it is BELOW where the stock opened up. It is below the VWAP. I want to short this stock.” And then it turns out to be a pretty good short all day.

Now, let’s look at a couple others. Dropbox ( NASDAQ: DBX ). First, let’s look at the daily chart. You can see what is happening here, this thing was big bubble vision here. It popped out of the squeeze, $30.00; it went up about 50 percent in just a matter of a few days. IQ ( NASDAQ: IQ ) had kind of done the same thing but not so dramatic but you could see the breakout. This thing was very, very dislocated from typical prices. But if we look at this on a VWAP basis here, we will just use the 15-minute chart, you can see how, with respect to IQ ( NASDAQ: IQ ), over the past several trading days the stock has really, really struggled to stay above the VWAP. It just wasn’t working at all. All the way here below and this is the issue with these big volatile stocks, they will bring you back in the spit you out and bring you back in spit you out. But generally speaking, the stock has been below the VWAP.

Today was a big, massive down day with Dropbox ( NASDAQ: DBX ). Similarly, you saw the stock peak way up here and since that time the stock has been trading below the volume-weighted average price. And by the way, again, this volume-weighted average price resets every day. It is kind of like those triple ETFs, they kind of reset every day. I want you to be using volume-weighted average price. If you are seeing a stock and you are wondering if it is time to buy this stock don’t just look at this and say, “Oh okay, it is back here. Now it is going to rip up here again.” I guarantee you that is not going to happen. I guarantee you, that will not happen. You will not see Dropbox ( NASDAQ: DBX ) do this. I haven’t seen this type of stuff before. I don’t think we are going to see it this time around. The same thing here with IQ ( NASDAQ: IQ ). The way this stock is trading it is probably going to at least fall another 20 percent. That would be my bet. This has 25 written all over it.

You can be looking at these things with the VWAP and as long as they are generally trading below the volume-weighted average price (I don’t know about shorting these stocks, they are too volatile for me) you at least do not want to be long these stocks. So if you are looking at Dropbox ( NASDAQ: DBX ) here, the way it was trading, you can see the big blastoff here and for 3 or 4 days in a row the stock was moving above the VWAP. Every day, accumulation, accumulation, accumulation. And then finally when it fell over on the 19th it never got back above the volume-weighted average price for more than a cup of coffee.

So get used to using volume-weighted average price in making your trading decisions. I promise you, you are going to make more money. And a lot of times you are going to make more money simply by losing less money.

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