Monday, July 27, 2009

Midday Briefing: Range Markets and the Importance of the Day's Opening Price

As emphasized in the past, one of the most important calls a short-term trader can make pertains to day structure. Note how, once we were unable to sustain early weakness and could not take out the S1 level, we moved into a range trade for the day. Having noted prior strength but waning upside momentum, this was not a surprise outcome.

One simple way to identify a range day is to look at how we're trading relative to the day's opening price. Trend days, by definition, will move away from the day's open; i.e., the day's open will be close to the day's high (in a downtrending market) or low price (in an uptrending market). When we see a market move away from the open and then snap back to the open, you have a good indication of range trade.

Once we make the identification of range trade, we know to be wary of buying strength near the day's high and selling weakness near the day's low--particularly if volume dries up on those efforts to set value higher or lower. For other ways of identifying a range market, check out this post.