Using Fair Price To Determine Market Trend

One of the ways I like to observe the markets short-term bias is by evaluating the trend in 'fair-price' over a series of days (basically a VWAP over several days) by taking each days price that transacted the most volume. This is a good technique to filter out the noise in more volatile multi-day price patterns or consolidations. We want to observe what is taking place in price and what participants are really saying about the markets current price levels. Taking that concept one step further, we can also evaluate the multi-day volume-weighted average price or fair price by volume over several trading days combined to see where the market really is. This helps me determine whether my entry position represents 'good' trade location.




I've inserted the NQ (Nasdaq 100 Futures) 15min intraday chart below and backtracked to the ECB bond-purchase announcement, 5 trading days ago. Lets have a look at what the market has been doing since then from the perspective of fair-price over the series:

From the chart above, you can reference each days 'Fair Price' realized. The trend in fair price is down. Clearly, from the chart we can see the downward trajectory in price and the SE-2788.75 (Short Signal Entry - Type 1) implying the markets price move below the 3-day regression overlay to indicate a short position and a short bias. Since last weeks announcement the market has backed up each day and established value within last Thursday's price-range. But nothing material has happened since last week. All the market has said is that last Thursday's fair price is too high at 2824.75 and we need to back up a bit to be sure we haven't gotten ahead of ourselves - and that's precisely whats been happening. Notice how the market has not 'rejected' last Thursday's range - yet. So, nothing has changed as a result. The signal that change is occurring will be by participants taking the price 'outside' last Thurday's trading range or seeing that the market is building 'value' above 2824.75 (highest Day value) and below 2787.25 (Lowest Day value).

The 4-day average fair price sits at 2792. This is just above where the market is about open today. An important signal going into today would be to see the market start accepting the price above 2792 level.

By looking at the past 5 days and where the market has developed we have 3 price levels that will imply directional change:
1.Market establishes value > 2824.75 in the coming days (Highest Value in 5 days)
2.Market establishes value > 2792 today (4 day avg fair price)
3.Market establishes value < 2787.25 (Lowest value in 5 days)

Our trading instructions for the above:
1.Long
2.Long
3.Short