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.
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7 comments:

Vic said...

Am I the only one who found this market shizoid today ? That last half hour rally caught me off guard with all the negativity out there today. Closed out my position for a small loss and ten minutes later the DOW goes on steroids...jeesh !

Trader Kevin said...

Interesting that they (almost?) traded back to the blue line late in the day.

Brett, thanks for another thought-provoking post.

Trader Kevin said...

Vic: Am I the only one who found this market shizoid today ? That last half hour rally caught me off guard with all the negativity out there today.Once it's obvious to everyone that they're going down (that is, once everyone is short), who is left to sell them?

"He who sells what isn't his'n, buys them back or goes to pris'n."--Ancient Wall Street Proverb

Trader Steve said...

Not sure about the correlation but I've noticed that on some days, price on the ES closes very near the next days Primary Pivot after the days range has been roughly identified and traded to S1-S2 or R1-R2 areas.

Coincidence or is there some type of AM/PM trading range, trending market or a range between pivots points that might present a clue?

Brett, have you or anyone else out there noticed this observation?

Thanks as always for the great posts!

Vic said...

"Once it's obvious to everyone that they're going down (that is, once everyone is short), who is left to sell them?"


Good point Kevin,was expecting buying to come in much sooner. I still have some fear factor from those dark market closing sessions in the fall when the last 30 minutes on a down day kept on going down bigtime. They flashed two biggish downticks just before 3:30 and I bailed. Somethin I have to still work on.

As always,a great post Brett.

ssgy said...

Hi Brett,

Thanks for the input. Do you have any suggestions ie reading materials/links , for someone interested to findout more about "opening price" and its relevance to trading?

Many thanks.

Trader Kevin said...

ssgy, try to find Toby Crabel's book.