Monday, April 23, 2007

Gaining Direction From The Opening Range

A simple way to deal with a market bias that is opposite of the price action or the short term trend of the market is to have a system and some rules to go by. If a trader feels that a market is overbought, it can be costly when the market stays in an overbought position for weeks. Having some rules that deal with the opening range of each day can keep this bias from costing a lot of money and ruining the healthy mental state needed for profitable trading.

This simple method deals with measuring the opening 15 minute range of what ever market that is in the cross hairs. This example will deal with the S&P futures from last Friday.

In this chart, the opening range is marked by the upper and lower black lines. The high was 1492.25 and the low was 1489. This 3.25 range is now an area of the day to watch. Regardless of what has happened yesterday or in the overnight market, this range will tell us the tone for the day. If we can break up out of this range it is a bullish day, regardless of the overall daily trend of the market. If we can not hold this opening range and turn it into a support area, then it becomes an area of resistance if we break down out of this range. In this example, we broke down out of the opening range. It is important to remember the width of the opening range. Today's area was 3.25. Once we broke down below the opening range, our first price target was the low of the range(1489)minus the width of the range(3.25). This target is marked in red, 1485.75. Very often when this first target is approached, the price will pause and either repeat this move down another 3.25pts or hold and start to try to build a base. Today when this area was reached, it held and there seemed to be strong buying/short covering move right back up to the bottom of the opening range. The bottom of the opening range is an important area. Once prices entered back into the opening range, the chances are great that the low of the day has been put in, and there is a chance that there will be a run at the high opening range. This happened Friday.

This is system can be made as simple or as complex as need be. It is important to watch the size of the opening range. The size will often determine what reasonably can be expected for the total range for the day. Through personal experience, there are two moves once out of the opening range. It is either 2 moves in the direction of the break, or there is a move one width with an attempt to get back to the range. Often as the day goes on, and the market spends more and more time out of the range, it will make an extreme move into the close to what ever side of the range it is on. It is very helpful to have a full understanding of some of the Fibonacci rules on measuring price moves. These will help to identify failed patterns and help gain an edge on the pending price reversal. It is also to know what the daily pivot number is, and what the advance/decline ratio is at the end of the first move out of the range. These will both help add confirmation or suspicion to the move. Again, keep this system simple and add to it as you start to feel comfortable in what you are seeing.


This the current chart of the S&P 500 with the adv/decl moving average. This week's earnings should determine what happens. Earnings have been good so far, but there is bound to be some disappointments this week.

This chart shows the S&P 500 on a weekly basis. It seems like the goal is to get up to that old high from 2000. The Dow Industrials are there, and the New York Stock Exchange composite is above that level also. Below are two charts comparing the S&P500 to the Wilshire 5000, and the Nasdaq to the Wilshire 5000.

If anyone is interested in other specifics related to that opening range idea, click the contact link above and ask a question. I will share other rules I use with it.

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