How To Predict Market Action From The 1st Hour of Trading
Once the market opens each day, it can be rather difficult to surmise which direction it will go by the end of the day. For some it seems like a a random walk in the park. But for me, as a trader, there have been countless observations that I've made from over the years about what is seen in the early morning action and what it means for the rest of the day.
I'm going to be doing a 5-part series on understanding the early morning action and how you should be positioning yourself for trading the rest of the day. Today, I'm going to start off by talking about gap-downs.
As I lay out the 5 different scenarios (no way is the market limited to just these 5, but they tend to be the most common ones), I'm not saying that every time you see something play out early on, as I've noted, that in the end the result will be exactly as I say. Instead, you should look at in a way that says "the conditions are favorable that...."
So let's examine today's market condition example and what you can expect from it.
Heavy Market Gap Downs:
- This is like wild berries that look delicious on the outside, but are completely poisonous on the inside.
- Strong gap downs (particularly those in excess of 0.8 to 1.0% or more, often lead to huge reversal days. Why?
- Bears fear missing out on a huge move down so in the excite of things they short at the market open creating an initial push lower.
- Bulls see that most of the downside risk has likely been achieved for the day, so they buy the dip.
- After the 1st hour of trading, the market will have put in its lows for the day, and their will be a period of sideways trading, followed by an eventual push higher in the market.
- Once we get into the afternoon, those bears that initially bought in the morning start bleeding red in their portfolio, and as a result cover their positions and become discouraged by how the day has unfolded for them, and thereby leading to additional buying (i.e. covering).
- Bulls now have some profits to play with, and will more often than not add to their additional positions from early in the morning, as they ebb with joy and confidence at their apparent bottom-picking skills.
Here's the Chart Example.
The Result: The market will be favorable for a market bottom to be put in early on, and will often times form sideways channels, or inverse head and shoulders, or cup and handle patterns (IH&S probably being the most common one), with a very strong rally to nearly match or exceed the previous day's closing price.