Article / 05 October 2016 at 13:00 GMT

When nothing appears, trade it

Hypothesis Testing
United Kingdom
  • Sometimes, 'nothing' on an end-day chart is indicative of potential next-day moves
  • A lower end-hour points fall compared to the open-hour rise could be bullish
  • Markets naturally rebalance within the real open marketplace after opening skews
The hour before the opening bell can often skew markets
before the efficient market-pricing mechanism kicks in. Photo: iStock

By fxtime*

Mean reversion events invariably occur after extreme moves but such moves are often a result of stops being triggered and causing a market move to accelerate faster than the usual rate of change we see in a typical day.

When you strip out the stop orders, you are left with a series of micro gaps on the tick charts. You don't need to see these events to know they are there....usually on a normalised chart there is simply a bar or candle evident with no gaps evident, but they are there even if you see nothing at all.

End-of-day range data using the close price can only give an indication of what will be regarded as an 'extreme' move. Last week I posted a series of charts showing such events occurring after the weekly article release.

A range that exceeds (between end of day close prices);
FTSE100             75 pts
SP500                 24 pts
DAX                   185 pts
USDCAD           185 pts

A close beyond these ranges imply a mean reversion (50%) within one week of the event but require the use of options or binaries (one touch or vanilla) to prevent major drawdowns and fix risk parameters. Such strategies can be applied to all major indices and forex pairings at end of day and even intraday.

But as shown last week, this is only one aspect for such trades. ''Nothing'' may well appear at the close of each cash market. The market may well rally slowly upwards throughout the day and then in the final hour we see profit taking and a dip in the index.

There is nothing unusual in such an event and we normally would not take any directional market bias for tomorrow's movement — after all, this is an event we see all too often. But should we look at the final hour dip and draw any conclusion(s) to tomorrow's market predisposition? We may well have a bullish close but we can also guess at the market positioning at the closing bell.

Obviously we could use Steidlmayer's techniques of plotting every 30 minutes of market distribution but that would be time consuming and few of us have the time or will to do such a mundane task. However, what we can do is look at the opening hour and compare it to the closing hour.

Time really does matter. Photo: iStock

If the trading range is pretty much the same, then we know the market hasn't altered its trading positioning from the start of the day. But in the bullish example, if say the SP500 had risen 8pts and the closing hour it fell 4pts, then you have to assume that market players are bullish and are keeping their trades open and seeking greater profits the following day. Nothing is immediately evident on the charts for wave patterns but the data is there when you compare the two ranges.

Time and price overlaps occur when we move from pre-market to open market moves. Often the hour period before a market event such as the opening bell becomes skewed by positioning/re-balancing for dividends or fx price fix points.

The subsequent hour is where the so-called efficient market pricing occurs whereby markets naturally rebalance within the real open marketplace via price and will naturally ebb and flow within a price band/range so if we look at the overlap of these two candles/bars and trade the price break out of the overlap for a scalp you have a higher probability of success than the usual price breakout trade setups. The usual chart settings of open, high, low and close show nothing for a trade signal but hey are there.

Hopefully the charts following will highlight ''nothing'', except that perhaps more than nothing can be earned.

Cable chart for October 3

Source: SaxoTraderGO

FTSE 100

Source: SaxoTraderGO

— Edited by Martin O'Rourke

*Fxtime is an alias
fxtime fxtime
Cable chart....obviously my usual scalp trades from earlier in the day would have triggered but for clarity this is a chart referring only to the above scenario(s)...luckilly it worked :-)
fxtime fxtime
Update on the FTSE open hasn't closed yet but so far we have a pretty much neutral day today where as yesterday we saw that Long only trades were kept open on balance. If there is no big sell off in the final hour then we have to assume that those same long trades remain presumably awaiting NFP. A break of todays lows (now or tomorrow) would change positional trades though so if you are long adjust your stops accordingly imho.
zefy zefy
Good that you mentioned NFP. There is certainly a need to recognize patterns which tell markets are waiting event or news.
fxtime fxtime
Interesting...the sp500cash index has certainly exceeded the suggested 24pt spread between price and last night close we are currently 2134 so lets see if wander back upto 2144 within 5 trading days?


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