Bitcoin is caught in a giant VWAP squeeze: Getting Technical

Yahoo Finance Video
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Brian Shannon, founder of AlphaTrends.net joins Yahoo Finance's Jared Blikre to break down the powerful anchored volume weighted average price indicator and what it's revealing for bitcoin traders.

Video Transcript

[MUSIC PLAYING]

JARED BLIKRE: Welcome back to Yahoo Finance. I'm Jared Blikre. And guess what. It's time to get technical. And for that, we are bringing in Brian Shannon, founder of AlphaTrends into the stream here.

Brian, I told you I wanted to break down anchored VWAP. This is such a powerful tool that you use and I've been using for over 10 years now going back quite some time. So can you break it down for us? And for that, I have some of your charts and we can start with Bitcoin.

BRIAN SHANNON: Yeah. Well, you know, it's dollar cost average basically. What we're looking at on this Bitcoin chart-- I assume you've got that daily chart up there Jared, I can't see that. So you know, last year in July Bitcoin broke out and it had this phenomenal run. Well, I anchored a volume-weighted average price from that event. The event was significant because that's when the tide really turned, the buyers were fully in control at that point. And you can see that that black line is representing the average price since there.

Now it's the average price that the purchasers have paid and it's also the average price of any short in this market. So what we tend to see is on pullbacks that that will be a level of support. There's a lot of price memory built into that. So it tends to act as support and that's exactly what we're seeing right now. So right now around the 30,000 level is where we see that volume-weighted average price and that's been support here a couple times.

The downside though, is that we're significantly off the highs and we are still trying to find balance here in this market. If you look at the dark red volume-weighted average price, that is the volume-weighted average price from the peak. And that's still declining, it's at about 45,000. Just below that is the orange one, that's the average price since the beginning of the year. So since the beginning of the year, the average price that Bitcoin has been transacted at is about 43,000.

So there is one more there, not to confuse things, but it's the lighter red line and that is the volume-weighted average price since the really sharp leg lower on May 11th. And we can see that that has been a level of supply in this market. So right now we're kind of in this range where it's like dropping a ball out of the 20th floor. We're starting to stabilize, the volatility's coming out of the market and there's really no hurry I think to initiate a new long position in here if they don't scare you out, they say they typically wear you out. So I think we need some time to turn sideways. If we can get above, if you look at the shorter-term chart that I've given you there-- do you have that one, Jared?

JARED BLIKRE: Yeah, we have it up right now.

BRIAN SHANNON: OK so that represents the average-- I'm sorry, not the average, but each candle on there is four hours of time and that pink line that we see from May 11th has been resistance. We have traditional resistance there as well at $40,000. If we can kind of keep banging away at that, the more times that resistance is tested, the more likely it is to fail. And I think that if you get it through 40,000 you're going to see a quick pop to 45,000 but that's not going to turn this thing around. It's just going to be the next stopping point to kind of re-evaluate where things are and see if it can rebuild for continuation to you know 100,000 and million-dollar price targets that people have out there.

JARED BLIKRE: Why stop at a million, Brian. We can-- 10 million, a trillion, to the moon.

BRIAN SHANNON: It gets press.

JARED BLIKRE: Yeah, exactly. If we have time for VMware we'll hit that at the end, but you have a slide here that details VWAP or volume-weighted average price using average price per share paid during the time studied, $1,000 of Apple bought on the 15th of each month. Why don't you break down what's going on here?

BRIAN SHANNON: So it's really the easiest way to think of what VWAP is. People think volume-weighted average price, that sounds confusing. Well, most investors are familiar with dollar-cost averaging. Maybe you're going to put $500 or $1,000 into your retirement plan each month. And during this time on this chart, it shows buying $1,000 worth of Apple each month on the 15th. And on the first month, you bought 5.02 shares. At the end when the price of Apple was significantly higher, you only bought 4.25 shares.

So when you look at it, you know that you invested $7,000 and you look at how many shares that you have. So 7,000 divided by the amount of shares that you have tells you your average cost basis for those and that's the most significant number. It's basically your volume-weighted average price is what the dollar cost average is.

So when we look at an instrument like Bitcoin or any individual stock, it's traditionally measured from the beginning of the day and goes throughout the session. The anchoring part is what makes it a little bit more unique is we can measure from any point in the chart who's in control, buyers or sellers, and we know that definitively based on actual dollars, not on opinions or time-based moving averages, but on actual dollars in the market where are people positioned long or short.

JARED BLIKRE: Brian Shannon of AlphaTrends. Thank you as always for breaking that down.