Stock markets have distinct, predictable habits of behavior. Learning these repeated patterns is not a intuitive gift, rocket science or clairvoyance. It’s just a matter of time and observation combined.
One of many predictable patterns is price direction past 2 P.M. EST into the closing bell. Periods of low volatility in stock markets tend to have active, directional morning periods and dull, drifty afternoons. Periods of normal to high volatility tend to have choppy or spiky morning periods with wider directional swings in the afternoon.
Fundamentally, big-money players are active in the afternoons during normal to high volatility. That’s what creates volatility and movement in the first place — high volume participation. Likewise, low volatility periods develop when large funds and institutions actively square up their positions in the morning and make no adjustments in the afternoon.
Knowing the fundamental reasons why mornings and/or afternoons are most active is nice, but does nothing to put money in our accounts. Knowing “why” is far less important to traders than knowing “what” — i.e. how to take advantage of that knowledge.
2 P.M. EST Turn
For whatever reason(s) the 2 P.M. EST zone tends to be pivotal for stock markets. What happens in that zone tends to setup the last hour or two of price movement in predictable fashion. There are a number of simple patterns to be measured, we’ll profile one of those here today.
When price action has been trending or directional intraday, it usually marks a session high or low in the late morning to early afternoon. Following that peak high or low point respectively, there is a pullback against the prevailing trend somewhere near 2 P.M. EST. Could be a little earlier, might be later, often right on the top of hour mark. Invariably there is a retest of the current session extreme, and that tells us pretty much everything we need to know from there.
If price action breaks above current session highs in an uptrend OR breaks below current session lows in a downtrend from that 2 pm EST zone, expect a strong continuation of the directional trend into the final hour and/or closing bell.
On the other hand, if price action tests the peak high or low and gets rejected at double top/bottom or lower-high/higher low pattern, price action has probably peaked and a closing bell reversal is more probable than continuation of the trend.
Figure 1: S&P 500 Futures: 09/30/2008
One example of trend continuation confirmed is clearly illustrated from the 9/30/2008 session. S&P 500 futures peaked around noon (arrow #1) and pulled back to layers of support from there. No clear way to tell whether the final hour would continue or correct until those current highs were tested again. Once that occurred at 2 P.M. EST, we saw price action break above (arrow #2) and trade at new session highs. That was clear confirmation of further upside potential from there into the closing bell. Indeed, a strong gap & go trend day offered solid profit potential into the close from long trades taken all the way.
Figure 2: S&P 500 Futures: 10/21/2008
Compare that to the 10/21/2008 session. Price action peaked at its high just past 1pm est (arrow #1). The customary pullback to test trend strength happened as usual. Breakout to new session highs (arrow #2) confirmed higher levels ahead, which did happen for a brief period.
This time around, price action could not hold the breakout to new session highs. Notice where the decisive 2 P.M. EST turn failed to hold support? A breakdown below those critical levels (arrow #3) now confirmed the high probability of downside reversal rather than upside continuation into the closing bell.
Figure 3: S&P 500 Futures: 10/22/2008
In this example, price action broke below morning lows around 1pm est. The subsequent lows into 2 P.M. EST held consolidation for an hour, before breaking down into a cascade lower before squeezing back up to that exact mark at the close. As usual, the 2 P.M. EST zone is a decisive one for predicting what unfolds from there into the final hour and/or closing bell itself.
Measuring price action through predictable patterns is the easiest, most consistent way to succeed as a trader. That is akin to viewing the entire forest while selecting prime individual trees for logging and harvest. A fixation on following black-box systems, chart oscillators, sentiment indicators like tick, trin, put/call, squeezes, etc is more myopic view of trees. That mentality will not let you see = anticipate price action for what it is going forward. Knowing what price action will do through mechanical measurement of repeated patterns is how the true professionals trade.
Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures and commodity markets. Mr. Passamonte’s trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York. Click here to visit CoiledMarkets