Often the most exciting, yet most hazardous time to trade in the stock market is the first 30 minutes of each market session. Those first 30 minutes, if you are not disciplined, can reek havoc on your portfolio. It is that time where most of your amateurs will watch what is going on in the pre-market futures and pre-market trading in various stocks, and become overly exuberant and place a market order at the market’s open. Folks, this is the worst possible thing that you can do – to say the least, it’s a sucker’s trade – Don’t be a fool for it!
Today was the perfect example. The market had the making of a 400, 500, heck, maybe a 800 point rally in the Dow. China had a huge rally the night before off of a $586 Billion stimulus plan that saw overseas and Europe with gains from 3% to 6%. The U.S. Markets were no different, the Dow was trading above 200 points in the pre-market and into the open. There was no catalyst for the market to come off of these highs, and the shorts were destined to cover in mass. Right?…WRONG! Those who started placing orders, believing the market’s strong open would turn into an even stronger finish came away holding the bad for everyone else who sold on the strength, and as a result, the markets fluctuated in negative territory by mid-day and even saw triple-digit losses before finally settling in at about 73 points in the red.
It is important to remember that when the market gaps at the open, it is most likely going to close that gap, just like a window that opens, it eventually has to be shut. In fact on an intra-day basis, the market is likely to close the gap roughly 70-80% of the time. So if the market gaps up 1% or 2%, don’t go initiating a trade, or you are more than likely going to be left at the end of the day with an unnecessary and very preventable loss. Yes, it may seem like the market is going to take off without you, but it won’t. The key is to be patient and wait for the prices to settle down. There is a lot of hype and excitement in those first 30 minutes, and the smart money is waiting to pounce on those who are gullible enough to follow that euphoria, whether it be up or down, and take a position opposite of the direction the market opens at, only to close their position at the market’s previous day’s close.
Is there a time when you can trade to your benefit at the market open? Yes. Let’ say that you are wanting to purchase “Stock ABC”. Yesterday it closed at $100/share. The overall trend of the market is very bullish, but on this particular day, it is showing a 1% gap down. Stock ABC follows suite and opens roughly 1% down at the open also. You intend to trade this stock long, so you put your order in at $99/share. You get filled, the market closes the gap, and now you are sitting on a 1% gain. The market continues to surge after buyers jumped in on the dip, and the markets close up 2% on the day. Your stock had a fantastic day and also closed up 2%, but because you bought on the dip at the market’s open, you were able realize an extra 1% to your position. And what was to be for those poor souls who shorted the market when it gapped down 1%? They were the ones that helped fuel your gains by them covering their own short positions. So in the end, hype and hysteria lost, and rationale and collective reasoning prevailed.