Early trading often dictates what is likely to occur over the course of the session. This does not mean a trader can know exactly where the market will go, but rather the information provided near the open can help determine if the day is likely to be ranging, trending, sedate or volatile. By gathering certain types of information, a trader can better prepare themselves for the rest of the day. (For more indicators of how markets will respond, check out 2 Indexes That Help Assess Market Behavior.) TUTORIAL: Stock Basics

Why the Open Matters
The open is the trader's first chance to get a look at what the trading day may hold (the pre-market also provides clues). Information from overnight and international markets is being absorbed and acted on by groups of traders as the markets head for the open.

Investors have read news overnight and placed their orders with brokers. Professional traders are calculating how this will affect the first few minutes of the trading, and hedge fund and mutual fund traders are either actively involved or taking a back seat.

For day traders, the interaction of these groups provides valuable insight, which can aid the trader as the day progresses. Day traders need to watch:

  • How much activity is taking place (who, how much and in which direction)
  • If there is confidence in the move
  • Where likely failure or surge points in price reside

Volume
Initial volume in the morning is always high compared to the rest of the day, generally only rivaled by closing volume. Therefore, morning volume compared to intra-day volume explains little. Opening volume must be compared to other opening volume. Increased volume generally means increased volatility and a likely greater change in price. High volume is the result of large institutions buying or selling stock, and therefore attention must be paid to volume. High volume in an index or stock early in the day indicates that institutions are involved and there is a higher probability of daily sustainable trends. Low volume near the open of a stock indicates it is primarily short-term traders involved, and thus the daily climate is likely to be more of a ranging day.

To gain further insight, a trader may wish to filter volume by size. While small orders make up most of the trades on a stock (market), large orders account for most of the total volume. Large orders in the market are a sign of institutional activity. If the large orders sustain themselves in a particular direction, it is a sign of likely trending. Minimal large orders indicate more ranging movements. Large orders going through on both sides of the market indicates range bound short-term, but that a trending move (quite possibly aggressive) will ensue as one side conquers the other. (To learn more about institutions, read Keeping An Eye On The Activities Of Insiders And Institutions.)

Gaps and International Markets
Traders may begin watching pre-market and see that the indexes and stocks have already moved well away from the previous close on news or correlations with other markets.Some local and global markets are heavily traded prior to the official stock market open. Aggressive moves in these markets provide insight into what is possible as the stock market opens. Have stocks taken into account moves in gold, silver, bonds, oil, currencies and international stock markets? Did these markets have breakouts or severe declines? If so it is highly likely we will see equities adjust according to their correlation with those markets. Little action over night or in other markets indicates passivity and, unless something drastic occurs during the day, the trading day is likely to be dominated by range bound environments.

Confirmation of Moves
A trader wants to be able to get some insight into whether an early market move is sustainable or if it is likely to tucker out – and there are many ways to help determine this. This will not only aid the trader in making trades on those moves, but it will also help in determining what the overall tone of the day is likely to be like. Some trader may look at $TICK, which is a measure of NYSE stocks trading at their offer minus the stocks trading at their bid price. It is a good gauge of the number of stocks participating in a move, and extremely short-term changes in sentiment.

Slightly less sensitive indicators traders can use are on-balance volume (OBV), Chaikin money flow or the money flow index. These indicators use slightly different calculations but help to determine if a price move has underlying strength. Aggressive moves off the open which are not accompanied by high volume - or confirming signals from the indicator(s) - suggests an eventual a failure in the move. If the indicators are largely within former ranges, expect price movements to be constrained.

The indicator's particular level is not important in this case, rather, it is how the indicator is acting relative to recent activity. Little change in the indicator(s) (or a move in the opposite direction) with a big change in price, means a likely correction. If the price move is confirmed - that is, if indicators move with price - there is a better chance the move is sustainable and a trend has a higher probability of continuing. (For more on what volume can mean to the trading day, check out How To Use Volume To Improve Your Trading.)

Technical Levels
Before the day even begins a trader should draw support and resistance lines – these include horizontal lines and trendlines (sloping). Has the stock or market been in a range lately or has it been trending? Are we near support and resistance? By drawing the support and resistance lines beforehand, a trader will have better understanding of how the day is likely to unfold when trading begins.

If the market has been in a range and opens mid-range, more of the same can be expected. If the market opens near, or even above or below, resistance or support, then confirmations and volume become very important.

Plotting technical levels will also help throughout the day. As the levels are approached, traders can determine if other market factors are pointing towards a legitimate breakout or if the price will pullback from the level based on the aforementioned methods.

Tying It All Together
No one piece provides all the information we need; rather, all these elements work together to help us determine the type of day it is likely to be in the markets. By looking at international markets as well as other heavily traded commodity and asset classes, we can see if there already have been moves worth noting. Our own technical levels specify points where the price could stop and reverse, or surge. Using volume analysis and indicators can help determine what is likely to happen at our technical levels. The first few moments of trading provide a lot of information. If a trader analyzes that information closely, they will gain insight into whether the day is likely to flat or trending, volatile or sedate. (For further help on technical indicators, see Using Technical Indicators To Develop Trading Strategies.)

Related Articles
  1. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  2. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  3. Investing News

    Is It Time To Sell Technology Stocks? (LNKD, AAPL)

    Technology stocks have taken a drubbing in recent days. Is it time to sell them?
  4. Active Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  5. Economics

    The History of Stock Exchanges

    Stock exchanges began with countries who sailed east in the 1600s, braving pirates and bad weather to find goods they could trade back home.
  6. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  7. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  8. Fundamental Analysis

    5 Predictions for the Chinese Stock Market in 2016

    Find out why market analysts are making these five ominous predictions about the Chinese stock market in 2016, and how it may impact the entire world.
  9. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  10. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  3. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  4. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  5. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center