Watch the Opens

With any trade candidate, recommendation, or opinion that is formed outside of market hours, the best results will come from watching the next market open and making a determination of whether it still makes sense to implement that trade, or to adjust or time it accordingly. This is difficult for traders not able to watch the opens. Over time, they may average slightly lower returns and success rates than traders who are able to react to the opens.

Can the trader who can't monitor market opens still do well over time? Certainly. But the observer of market opens can often take advantage of the additional information that is obtained from watching the open. An excellent example presented itself on Friday.

In Friday's Seasonal Forecaster newsletter, I focused on Meritage Homes (MTH), and long stock and covered call trade possibilities. Before entering any actual trade, a determination should be made if the trade is appropriate for the current conditions. Bullishly-oriented trades like long stock or covered calls are not trades to enter when the market is falling.

Shortly before the open you can get a feel for how things will start by checking the Marketwatch.com website. It will tell you what the futures are indicating for the open, if the S&P 500 is likely to open up or down, strongly or weakly. Most online brokerage sites can also show charts with pre-market trades on individual stocks.

On Friday morning it was obvious the S&P was going to open down, fairly strongly. MTH did not have any pre-market trades to indicate which way it was going, but the Bid/Ask levels on the stock were falling.

Right after the open, the S&P fell sharply for the first 15 minutes. Watching a 15-minute chart, a straight-down 1.1% red bar inked itself. The second 15 minutes produced another drop, but it was clear the selling was subsiding. The third 15-minute bar (at 10:00 am Eastern) actually started moving upwards. Buying was starting to come in.

MTH gapped down sharply at the open, from 44.08 to 42.75. Lagging a little behind the S&P, MTH continued downwards for three more 15-minute periods. At around 10:30, it set a low of 41.45, but closed that 15-minute period in the upper-half of the candle. A ‘hammer' had formed, a possible reversal indicator.

At 10:45, MTH logged a solid up-bar. At 11:00, MTH began the next 15-minute period by continuing to move upwards. With the opening selling apparently over, this was a good time to consider entering the MTH trades. MTH could have been picked up for around 42.25.

MTH continued gaining right into the close at 43.72.

Someone trying the long-stock trade at the open would have gotten filled around 42.80. If there wasn't a large gap-down at the open, the opening trade could have been around 44. The stock did end the day back up near that level, but at one point during the day the stock was down almost 6% from Friday's close.

If you had watched the 15-minute chart and entered when the selling subsided and the 15-minute bars were starting to set higher highs, you could have entered at 42.25. The close at 43.72 means this trade is now up 3.4%, after just one day.

With a covered call strategy, you could have bought the stock at the same point, but waited until later in the day, after MTH rose a bit, to sell an April 45 call against it. The call could have been sold for $.55, and if the stock was bought at 42.25, that covered call position is now up 4.8% (the cost basis being $41.70).

Any trade you are considering involving options needs to be re-analyzed just before placing the trade.

Say my Monday morning newsletter focuses on stock XYZ, closing Friday at 132.5. I suggest a Bull Call spread might work, showing a sample ‘Buy 2 April 135 calls and sell 2 April 130 calls at 1.3 limit'. On Monday morning, XYZ gaps down to 127.5, but selling quickly dissipates, and you think a bullish trade will still work. However, the 130/135 spread may not be the ideal setup in this case. You should analyze the current Bid/Ask prices on the 125/130 spread, as well as the Open Interest levels. If the numbers work out, enter the 125/130 spread. If Bid/Ask spreads are too wide, or Open Interest levels are low on one of the options, it may be best to not consider any trade at that time. Keep watching prices though for several days. A better setup may present itself several hours or days later.

Watch the opens on a regular basis and you'll start to notice a pattern. What happens in the first 15 to 45 minutes is often different than what happens in the remainder of the day. I've come across day-traders that trade only the open of the market or in particular stocks. They trade the opening momentum and quickly exit the trades as soon as the momentum ceases or changes direction.

Other traders quaintly refer to the first hour as “amateur hour” and don't enter any trade before 10:30 or 11:00 am.

I'm not always able to watch the opens on days I want to enter trades. But when I can, I hold off entering new trades until I've got a clear picture of the current market.

And if a good setup doesn't present itself, don't make a trade. Every week there are new opportunities. Pick only the best ones.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, type in www.markettamer.com/seasonal-forecaster

By Gregg Harris, MarketTamer Chief Technical Strategist

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