Right on Time and Target
In our Professional Trader courses at Online Trading Academy, we teach our students to stay away from the danger zones of the market. One of these danger zones includes the opening 15-20 minutes of the trading day. There is a saying, "Amateurs open the market and professionals close it." The opening period (9:30AM EST to approx. 9:50AM EST), is also known as the clearing stage. This is when Market Makers are eager to clear the backlog of customer orders which were placed after the market closed. The unknowing general public comes home after work and watches TV to get their financial news. They get excited about some stock that was talked about (Booyah...ugh!) and rush to buy it. The Market Makers are all too happy to push the orders through in the open to capture their spread and commissions.
Those of you who have witnessed this rush will also notice the enormous amount of shares being pushed through the market. The Time and Sales prints are running through so fast that they are difficult to read. The quotes on the Level 2 Bid and Ask may also not match up with the prints. Obviously, novice traders should avoid this time if they wish to keep their capital. But when is it safe to trade? Just because the prints slow down and match the quotes doesn't mean you are in the trend of the day.
I remember we used to have clocks which had certain times painted red, yellow, and green denoting the times of the trading day where it was dangerous, cautionary, and good to trade. If it were only that easy! Remember that we also have the morning reversals which can create a bit of chop. The first reversal usually occurs between 9:50 and 10:10AM EST. This is when the Market Makers have cleared out most of the customer orders and are ready to recoup some losses and take profits on their contra-trades. This causes a nice reversal which may be traded. But we are talking about a 20 minute window here. When is the reversal most likely to occur?
There is a helpful guide which may identify the turning point for the reversal. Better yet, it is free! I use the Futures vs. Fair Value to gauge at what price the market may turn. First, I identify the prior closing price of the S&P 500 Cash Index.
In this case the close on Thursday, January 17th was 1333.25. I then look for the Fair Value for the S&P. This is reported on CNBC but I use the figure from www.programtrading.com under "Today's Buy/Sell Programs."
For Friday, January 18th, Fair Value was $4.22. This is a constant for the day and will not change until the close of the market. Adding the Fair Value to the S&P yields the level at which the S&P 500 Futures contracts should be trading. If the Futures are trading above Fair Value then the Cash market tries to catch up and the market should rise at the open. This works the same on the downside when the market falls. According to these calculations, the Futures should be trading at 1337.47.
Just before the market opens, I check the quotes on the S&P 500 Futures to see where they are trading. If you do not have a CME quote feed (this costs about $60 on most platforms), you can simply go to www.cme.com for a delayed quote which should work for our purposes.
As you can see, a half hour before the market was to open (the time shown on the CME website is Chicago), the Futures were trading at 1354, well above Fair Value. Subtracting our $4.22 Fair Value, this means the S&P 500 should rise to about 1350 at the open. I usually check the CME quote just before the open of the stock market to get another reading.
Sure enough, the market opened and the S&P rallied. It paused at a pivot point (that's a subject for another article) before making the morning reversal at 1350.28 at 10:00AM EST.
Right on time and target. It turned out to be the high of the day as well. This reversal was the trigger for two of my short trades for the day as my stocks followed the broad market. Now this technique won't work every time, but it helps me to identify when and where those morning reversals may come and thus reduce the element of surprise.
Until next time, may all your trades be green and your losses small.
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As a former stockbroker, brokerage trader, and hedge fund trader, Brandon brings various market views and insight to his classes. A wealth of knowledge, he has held NASD securities series 7 and 63 licenses. An OTA graduate himself in 1998, Brandon has been trading his own account since. Brandon taught for OTA in 1999 to 2001 before becoming a Realtor and Mortgage broker holding licenses in 15 states. Returning to the OTA family late 2005, he now balances trading, teaching and a real estate career.