Monday, August 17, 2009

After a Very Weak Open, What Can We Expect Next?

The S&P 500 Index futures are trading significantly lower this morning in pre-opening Globex trade, breaking important support around the 990 level. Indeed, if you look at the profit targets from my daily pre-opening Twitter post (follow tweets here), you can see that we're trading below the S3 target level before the market has even opened. That is significant overnight weakness.

(Recall that the proprietary pivot and profit target numbers are volatility-adjusted, so that an opening below S3 in a high volatility market is proportional to an opening below S3 in a low volatility market. Simply looking at what happens after ES opens 20 points lower is limited, as 20 points mean something very different in high and low volatility contexts.)

So what happens after we open below S3? It turns out that this is a relatively rare phenomenon: it has only occurred 50 times since the year 2000.

From the market open to the day's eventual low, the average loss has been -.94%. Of the 50 occasions, 27 have dropped more than half a percent from the open to the day's low. The size of the average loss is skewed a bit by very large drops from open to low after weak opens during the recent bear market.

Interestingly, however, if we look from the weak open to the day's close, the average price change is a gain of .67%, with 34 occasions up and only 16 down.

What that tells us is that we have often seen follow through weakness after a very weak open, but by the market close there has been no bearish edge and indeed has tended to be a rebound, possibly from late-comer bears covering positions.

In the spirit of the recent post, this is a potentially useful heads up for those tempted to follow a short-term trend on early intraday weakness. I'll be watching the basket of stocks closely as to how they trade from the market open to see if this pattern plays out.