From the October 01, 2007 issue of Futures Magazine • Subscribe!

Trading while the pit bulls sleep

An American in Paris sits at an ornate wooden desk in front of a hotel window overlooking the Place de la Concorde. He glances down at the pedestrians strolling along the Champs-Élysées, then refocuses on business. He studies his computer screen before clicking his mouse and going long the S&P 500. The ambitious tourist plans to make a few bucks before visiting the Musée d’Orsay and finding a quiet sidewalk café near the Luxembourg Gardens to enjoy a late lunch.

With the help of relatively recent technological breakthroughs, day-traders are able to work when and where they choose. Cyberspace is the new trading arena and the financial markets are more accessible than ever. With the right equipment and accounts, you can trade any electronic market, U.S. or overseas, and work anywhere from the shores of Cyprus, to a high rise in Singapore, to a three-bedroom bungalow in Key West. All you need is Internet access and the right tools.

Day and night, somewhere, there is always an active market. Generally, the liveliest trading center is the area where the sun is shining the brightest. That means that once the trading pits in New York and Chicago close for the day, focus must follow the sun westward. While the Chicago Mercantile Exchange (CME) closes at 3:15 p.m. (CST), the CME’s electronic marketplace, Globex, opens up just 15 minutes later, allowing an array of products to be traded nearly 24-hours-a-day. Other exchanges also operate electronic systems that allow trading to continue while the traditional trading pits are closed.

Many traders fear the night market because volume is thinner and familiar indicators such as the New York Stock Exchange Tick and advance/decline data are not available. However, even though New York and Chicago are quieter, Asia and Europe are busy.

Some good overseas indexes to watch are the Nikkei (Tokyo), Hang Seng (Hong Kong), Dax (Germany), CAC (France), FTSE (London) and Swiss (Zurich) futures. These indexes reflect how Asia and Europe view the markets. If a trend or global opinion is emerging overnight, evidence will appear on the other sides of the Atlantic and Pacific.

WHEN NIGHT BEGINS

Trading the evening markets effectively begins when Globex opens. The most important price is the opening price; that point serves as a pivotal point separating the bulls and the bears. Record the high and the low of the S&P 500 futures during the first 30 minutes of evening action. Those highs and lows are initial support and resistance and serve as guides for trading throughout the night. Before buying the S&P or anything else, wait for prices to rise above that initial high, and prior to selling see that the low of the first 30 minutes is broken.

Asia dominates the evening hours. The Nikkei opens in Tokyo at 6 p.m. (CST) (7 p.m. when daylight savings time is in effect). Trading on the Hang Seng starts two hours later at 8 p.m. (and 9 p.m. during daylight savings time). When Asian trading is winding down, the sun is rising in Europe.

Dax trading begins at 1 a.m. (CST) and a short time later the FTSE, CAC and SMI indexes start trading.

Of course, some markets and periods prove better than others. Two reliable after-hours trades are executed in the early morning hours from 4 a.m. to 7 a.m. CST. One is an S&P 500 futures trade and the other a Dax futures trade.

EARLY BIRD IN S&Ps

Just after 4 a.m. is often a good time to trade S&P futures. Here’s the setup. First, record the S&P 500 futures price at 3:30 a.m. Then record the high and the low from 3:30 to 4 a.m. These price points will be used for reference. If prices rise above the high, look to the bullish side; if they fall below the low, consider a bearish move.

Next, take a look at global action. How are Asia and Europe trading? One easy way to gain this information is by visiting Yahoo Finance (see “Using Yahoo Finance,” below). From here, an easy analytical tool for evaluating the information is the T-Square method. It is a simple problem-solving technique taught in many law school and business courses. Create a “T” on a worksheet and list the pros for buying on one side and those for selling on the other. If the bulls have a strong argument, buy just above the high of the early morning reference bar. If the bears appear to be out in force, sell below the low of the bar. However, be certain that world

sentiment on is your side.

A great example of this trade occurred on July 31, 2007. The high of the S&P 500 reference bar formed between 3:30 a.m. and 4 a.m. was 1485.00 and the low was 1482.50.

Parts of Asia were bullish: The Hang Seng closed up 1.96%, but the Nikkei was down 0.23%. Europe was decidedly bullish: The French CAC was up 1.85%, the German Dax up 1.71%, the Swiss franc was up 2.07%, and the FTSE 100 was up 2.48%.

(See “Overseas takes the lead,” below.)

Obviously, a buy was the play and that’s how it worked out. Those who went long the S&P as it crossed the top of the bar had a great money-making opportunity. As the sun began rising in the United States, domestic traders joined the buying frenzy and prices sharply increased (see “S&P follow through,” below). The move continued until news (in this case, personal income and spending data) broke at 7:30 a.m. As a rule, regularly scheduled news often breaks around this time, and it is a good idea to exit working trades by 7:15 a.m. or keep a tight stop on any open positions.

Admittedly, July 31, 2007 was an especially good morning for this trade. The night session was exceptionally active, allowing for those skilled in this strategy to make a nice profit. However, even during quieter sessions, this trade can often pay.

DAX: DANCING AT DAYBREAK

Germany is Europe’s largest economy, and the Dax is Germany’s blue chip stock index, consisting of 30 of Germany’s biggest corporations. The corporations listed on this index are powerful, making the Dax a good bellweather of Germany’s economy.

The Dax trades on the Eurex, a European options and futures exchange located in Frankfurt, Germany. It trades in 0.50 increments, and the value of each point is €25 (about $33). Currently, the average daily range exceeds well above 100 points. That wide trading span offers a number of profit-taking opportunities. Each weekday morning, the Dax futures open at 1 a.m. The session continues until the New York Stock Exchange (NYSE) closes at 3 p.m. CST.

Like our Nasdaq stock market, Eurex is an entirely electronic exchange. One early morning opportunity occurs between 5 a.m. and 7 a.m. CST. Here are the basic steps to follow. First, get a snapshot of the global action. See how Asia closed out and check what is happening in both the United States and Europe. Is the trend up or down? Is a buying or selling wave moving with the sun? Again use the

T-Square method and evaluate the case for buying and selling.

If a direction is discernible, concentrate on the Dax and study its path since its open.

Look for short-term support and resistance. Use 30-minute charts and key numbers (points of support and resistance) to make that determination. Bracket the nearest support and resistance levels. If the market sentiment is bearish, look to sell just after support is broken; if it is bullish, identify a buying point just above resistance.

Then, focus on volume and sales. It is important to know how much selling vs. buying is coming into the market. In the absence of a proprietary indicator, study time and sales figures or some other volume indicator to gauge this. Use the momentum of the market to determine when a wave of activity is forming.

Finally, look at key numbers. Here is a favorite rule: Sell on the nines and buy on the ones. That is, if my support and resistance bracket is 7938 to the high and 7922 to the low, look to buy at 7941 and sell at 7919. Once in the trade, take some quick profits on a portion of the position. However, if the move seems strong, hold a few contracts until just before the United States begins its day session at 8:30 a.m. CST, while being aware of a possible shift at 7:30 a.m. CST.

Once U.S. markets open for business, the Dax is an excellent indicator.

If you're looking to go long in another market, such as the S&P 500 or the Dow, but the Dax is sluggish or negative, think twice before taking that buy. Or, if U.S. markets are covered with gloom and doom, but the Dax is bullish, sit tight until the Dax supports the move rather than jump into an inconsistent arena.

Keep in mind, however, that the Dax can be volatile, which makes it dangerous for novice traders. Follow it for awhile before trading it or using it as an indicator to learn some of its peculiarities. An excellent source for learning more about the index is the Eurex Web site at www.eurexchange.com.

A few simple words of caution are critical for night traders: Sleep is essential. You cannot make every trade and watch the markets move 24 hours a day. You need a clear head and the wherewithal to analyze correctly and execute properly. Trading while sleepy and lethargic is a formula for disaster.

Even though the market is there around the clock, select trading times with care. Never overtrade or trade for entertainment. Use a proven strategy and wait for the right market conditions to execute your plan. Sometimes waiting is the hardest part, but patience pays.

Tom Busby is a 30-year professional trader and Founder of DTI, a trading school in Mobile, Ala. Busby is a member of the CME and CBOT and has been seen on Bloomberg, CNBC and BNN. For more on Busby go to www.dtitrader.com.

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