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To: Odama 09 who wrote (1233)6/21/1999 11:42:00 PM
From: TraderAlan of 18061
 
David,

This article is a short piece of a long educational module I did last year. Some of it is theory and this abbreviated version simplifies the subject somewhat:


TIME OF DAY - FIRST HOUR

Closing markets seek equilibrium in stock supply and demand. But overnight activities upset this delicate balance, forcing volatile shifts in morning prices. Specialists calculate this initial imbalance through their order book, sometimes triggering a gap open. NASDAQ market makers communicate before the open by displaying outside pricing until the most aggressive members win the inside positions. In both venues, changing spreads seek the moving targets of opening demand and momentum.

The opening surge may or may not ignite a subsequent trend. The first hour searches for a daily trend by forcing prices through a testing gauntlet. This process provides the road map for the floor to set subsequent pricing for their securities.

The 3rd Bar Reversal often presents the first challenge. This test refers to the 3rd bar or candle of the 5-min S&P Futures contract, measured from the opening of the equity markets. This time zone also corresponds with 9:40am to 9:45am, the end of the 15-min delay built into retail access to market quotes. Painting price for this retail crowd ensures some additional volume for the market makers. But since this group can be the last paper in the door, other market forces may take over and (possibly) trigger a reversal.

A second zone for opening trend reversal begins shortly after 10am. The strong expectation of this 35-min test becomes a self-fulfilling event. It also has tremendous value for short-term traders. Many day traders don't want to enter positions until early testing shows the trend they want to trade will remain intact. The 35-min test allows them to get into the market while volatility remains high.

Trends that survive this 35-min reversal test often continue throughout the day. This tendency elicits another unique event of the first hour. The last 15 minutes of this important period trigger capitulation by the losing side. Price movement tends to the same direction as the winning trend for the day and can be quite strong as day traders enter their first commitments.

The first hour's activity sets a theme that will likely repeat itself frequently during the trading day. Market participants reveal their strengths and weaknesses in this testing gauntlet. Volume then drops sharply, often constricting price movement and setting range resistance difficult to penetrate until one side gathers new momentum.

Alan

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