Thursday, May 21, 2009

The Importance of the Opening Price

The opening price (shown by the blue line for ES futures today) represents the market's first attempt at locating value on the day. A trending market will stay above or below the opening price for the majority of the session, as we reject that early estimate and probe value higher or lower. A bracketing or range market will tend to accept the early estimate of value, and we will oscillate around the open and/or the day's volume-weighted average price for much of the session.

Note how we attempted to establish value above the open in early trade today, but then rejected that level into mid morning. An attempted rally late in the morning could never push us above the open and we have been accepting value lower since that point.

An excellent tell, noted in the Twitter posts, was that--even as we were trying to rally to the ES open--the great majority of stocks in my basket were down from their opening prices. In other words, the move toward the open was dominated by a relatively small number of stocks (in this case, the financial issues). Once the financial shares could not sustain new day session highs, the entire market pulled back in the afternoon.

Knowing how we're trading relative to the open--but also seeing how individual stocks and sectors are trading relative to their opening prices--is useful in gauging evolving market strength and weakness.