The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “T...
How to Trade Trend Reversals Near the Open
06/10/2014 7:00 am EST
It is often a sign that the market will trend higher throughout the day when the E-mini S&P futures contract establishes a low for the day in the first couple five-minute bars. You might say, "How are we supposed to know the low is in until the end of the day?" The answer is that you don't know for sure, but there are some things to look for that will help sway the probabilities in your favor.
A decent-sized gap opening is one thing to look for. Sometimes the market just takes off from the opening bell and it is difficult to find a place to jump on board. Other times the market makes it a little easier, like it did today. Weekly and monthly pivots can be very powerful for turning momentum in the market. You can see the market bounced off the weekly pivot and set the low for the day within ten minutes of the open.
There are many ways to play this set-up. I often like to buy at an untouched weekly pivot if conditions look favorable. You can either try to bank a quick profit, or hold your stop just below the entry if you catch the bottom within a couple ticks. This can be a very favorable risk/reward trade if the market does continue to trend all day.
A bounce off a pivot alone does not always make me feel good about holding a trade and hoping I caught a bottom. Today, you can see there was a nice reversal bar (fourth bar) after the market tried to retest the low, and that should give you the confidence that the market is going higher. You can either jump on board when you see this, or hold your long position looking for a bigger gain.
This type of reversal bar often happens in the early part of the day and establishes the market direction for that day. The market will normally have a sharp rally for the next 30 to 60 minutes, and it is best to follow and not fight the trend. If you look back at the open halfway through the day and see the market opened on the low for the day and trended higher, the probabilities say the market will continue in that direction.
The same principles apply to the market opening on the highs. However, it should be obvious the market has been favoring a "buy the dips" on the open strategy. Buying breaks of the previous day's lows and breaks of intraday resistance has been the theme for the last two years. There was a time when it made sense to sell breaks of the lows, but it looks like the computers have taken over and you have to adjust to these changes.By Chuck Kowalski of FuturesBlog.com
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