Here’s a way to predict strong closes…
On Monday, as the market traded in a relatively narrow range during the
afternoon, my first thought was to stay with a long bias. The specific
thought that crossed my mind was that the NYSE TICK was displaying net buying
interest and price extremes–highs and lows for the day–tend to occur early and
late in the day.
As it turned out, that is exactly what happened as we closed near the day’s
highs.
In his excellent book The Logical Trader, Mark Fisher notes that the
high and low prices for the day are not evenly distributed as one might expect
if price changes were entirely random. Rather, days tend to see their high
and low prices toward the beginning and ending periods of the day. These
are the times that also tend to be most volatile and that show the greatest
volume, owing to higher participation by large traders.
I took a look at the last 36 days of trading, going back to the beginning of
September. We made the day’s high price during the first half hour on 12
of the 36 occasions (33%), even though the first 30 minutes of trade comprise
less than 10% of the time in a trading day. We registered the day’s high
price during the first hour of trading on 19 of the 36 occasions–a bit over
half–even though that only represents about 15% of the trading day.
During the same 36 trading sessions, we made high prices for the day during
the final hour of trading on 9 occasions (25%), which means that the daily high
occurred during the first or last hour 28 out of 36 times–over 75% of the time.
How about daily lows? These occurred during the first hour of trading
on 7 occasions and during the last hour 14 times. This means that 21 out
of 36 times–almost 60% of the time–the low for the day fell during the first
or last hour of the day.
Of course, September and much of October saw falling stock prices, so it is
not too surprising that we more often saw daily highs early in sessions and
daily lows late in trading. Indeed, one definition of a trending market
might be the tendency for daily price highs and lows to cluster early or late in
trading. If we can use indicators, such as the NYSE TICK, to identify
trending environments, knowing the odds of making daily highs or lows late in
the day can be quite useful in holding positions. That’s what happened on
Monday.
And how about the midday hours? We made daily price highs during the
11:30 AM – 1:15 PM ET time frame only one time in those 36 sessions. Daily
price lows occurred six times during that same period. Thus, even
though the midday hours comprise 33% of the trading day, less than 10% of price
extremes occurred over that period.
When prices make early highs or lows and cannot move beyond these in early
trading, I label those extremes “candidate daily highs” or
“candidate daily lows”. And when prices make new daily highs or
lows in the midday period, I entertain the hypothesis that the ultimate daily
highs or lows have not yet been put into place. That worked on Monday and,
if Mark Fisher is right, might be worth keeping in mind going forward.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com.