Use Pre-open Indicators to Improve Profits

Use Pre-open Indicators to Improve Profits

Knowing that the open consists of a period of inordinate volume, the Candle­stick investors can watch the movement of the stock price. If it is consistent with the other factors of a strong or weak open, the trade can either be ex­ecuted or withheld until the proper factors are evident.

The ‘other’ factors are simple indicators of what the market direction should be once the market opens. Each morning the futures can be observed in many places. CNBC has the DOW, NASDAQ, and S&P 500 futures posted in the lower right-hand corner of the TV screen. If a position were ready to be implemented, it would not be prudent to place the trade on the long side if the futures were illustrating heavy selling on the open. Tire signals need continuing confirma­tion that the buyers are still around. Dramatic selling pressure on the futures before the markets open is an indication that the buyers may not want to fight the selling pressure that morning. The direction of the index may be projected by what formations appeared prior to the next open. If it is expected to be in an upward direction that day, then the futures should be confirming that senti­ment in their activity before the open.

If the direction of the market is projected to go higher, a small pullback of the futures should be tolerable. If the futures leave the “open” as questionable, check the pre-open price of the stock itself. Having software that shows pre­market bids and asks provides a clear indication of what is happening in the demand for that stock as it gets near the opening time. That will be the most important illustration of how the buyers and sellers are lining up on the open. That does not mean that is the final indication. Sometimes a buyer or seller will commit their buy or sell order immediately after the market opens, not want­ing to show their hand too early.

If the level of tire bid and ask does not produce any concrete decisions, investigate how some of the companies in the same industry are acting on the pre-open. If they are opening above or below the previous nights close, that information should add some insight as to how the stock in question is going to act. (Take notice of the volume, if possible, pre-market. Sometimes very little volume will move prices more than what the regular market conditions war­rant.)

The first thirty minutes after the market opens it will swing around a bit. The general analysis should have reduced some of the potential possibilities of what might happen the next day. Buying ‘long’ when there is overwhelming evidence that the indexes arc going lower should not be done aggressively. Part of the previous night’s evaluation involved seeing continued buying strength in the markets in general the next day.

Buy on a strong open. Your analysis leans toward an “up” day. The stock you are trying to buy had a bullish signal tire prior day. Four combinations can occur on tire open.

1.     The Indexes/Futures appear to be opening positive. The pre-market indica­tion on the stock price is opening higher than the close of the night before. The buyers have not disappeared. This scenario best fits with your analysis. In this case, there is no reason why the position should not be bought as quickly as possible. Buy at the market on the open.

2.    The Indexes/Futures are showing strength but the stock position is open­ing lower than the close of the previous day Analyze the situation. If the “buy” signal was created by extensive buying, which created the signal, some of that buying may have been ‘fearful’ short covering near the close. That buying may have caused an extra boost in the price on the close. It would not be unusual to see some traders taking quick profits, moving the price slightly down on the open. If this scenario happens, watch how the price acts for the early minutes of trading. If there does not seem to be any sustained selling and the rest of the market seems to be staying strong, pick up a partial position. The “buy” signal showed a reversal the day before, the market is staying up, and there is not any major selling going on in the stock price. Anticipate that the lower open was just some quick profit tak­ing. As soon as you notice buying coming in, fill the rest of the position. On the other hand, if you want to be more conservative, try this strategy. When the price opens lower, put a ‘buy stop’ at the previous days close. The ratio­nale being if it opened lower but came back up through the previous days close, then the buyers were still around.

3.    The Indexes/Futures appear to be opening weaker and the stock price is opening higher. The signal from the previous day is the overriding factor. The buyers are still around, but the indexes are not acting well. The buyers are witnessing the weaker market indexes also. In this case, watch what the stock price is doing. If it appears that the buyers are coming into the stock despite the lower market in general, the buying force is not consider­ing the market conditions, they want the stock. Buy it. Conversely, if the stock opens higher and the market indexes are heading lower, watch to see if the price does not fizzle and start backing off. If so, wait for a while. See what the markets are going to do for the day. A safe approach under these conditions would be to put a buy stop at the open price. The rationale being if the price comes up through the opening price later in the day, the buyers are back in control.

4.    The worst scenario in the grid is a weak open on the indexes and the stock opening lower. There is not much of a decision here. The trade should not be considered. However, a buy stop at the previous day close acts as the same beneficial strategy as before. In this situation, if the markets and the stock price start coming back up before the end of the day, the buyers should be back.