From the January 01, 2009 issue of Futures Magazine • Subscribe!

Start late, work hard, quit early

You can lose money buying a rally. You can lose money shorting a break. The key is timing. If your own experience isn’t enough to convince you of these two trading truths, consider the following recent examples.

During the history-making week of Sept. 22-26, the S&P 500 broke on Wednesday, Sept. 24, then rallied sharply on Thursday, Sept. 25. After hours on Thursday, the S&P 500 collapsed. On Friday, Sept. 26, the banking sector collapsed on the New York Stock Exchange (NYSE) at the 9:30 a.m. opening bell. The collapse reversed immediately. The banking sector and S&P 500 began an all-day rally. The S&P rallied sharply into the NYSE 4 p.m. close.

From Wednesday’s break to Friday’s close, the S&P 500, technically, rallied. The United States and the world were waiting for the U.S. government to finalize a massive bailout of the U.S. financial markets. That expectation supported the S&P 500 from Wednesday’s break to Friday’s close.

If, however, you had bought Wednesday’s open, you might have been discouraged by Wednesday’s break and sold. You would have lost money. If you had been encouraged by Thursday’s rally and bought the close, you might have been discouraged by the after-hours collapse and sold. You would have lost money. You would have tried twice to buy into a market recovery, failed both times and probably been exhausted by the time the S&P 500 rallied on Friday. You might have missed Friday’s rally.

The action in crude oil was equally numbing. Crude oil churned sharply from Sept. 22 through Sept. 26. The action in gold was especially numbing. On Friday, gold surged then abruptly collapsed. Whether you are a position, swing or day trader, your trading system probably flashed a buy signal when gold surged. You would have lost money.


In every case, timing was the key. Traders were working the news, rumors, setbacks and progress surrounding the bailout negotiations, but in many ways that September week was like any other week. Trading is trading. Buyers and sellers routinely compete over direction and timing.

The more you understand the nature of timing, the better. For example, the S&P 500 does not always follow through on its pre-9:30 a.m. direction. When the S&P 500 sets a high close or a low close, price does not always follow through immediately on the next day’s 9:30 open. How do successful crude oil traders know which closes and opens will follow through and which will reverse? How do successful gold traders know when a surge is a bull trap? How do successful traders in general know how to time their trades? (see “True or false,” and “Head fake”)

Doing a better job of tracking the news is not an answer. Most traders do that as a matter of course. Markets can rally or break on good news. They can break or rally on bad news. The path to a better understanding of timing is to study time itself.

Two years of a trading diary closely tracking the time of day when the Nasdaq 100, S&P 500, 30-year Treasury bonds, the euro, gold and crude oil changed direction shows that there are seven major periods. Each revolves around the regular NYSE trading session: 9:30 a.m. to 4 p.m. (Eastern). The time periods are:

• The pre-market session (midnight to 9:30 a.m.)

• The 9:30 a.m. to 10:30 a.m. period

• The 10:30 a.m. to 12 p.m. period

• The 12 p.m. to 1 p.m. period

• The 1 p.m. to 3 p.m. period

• The 3 p.m. to 4 p.m. period

• The 4 p.m. to midnight period

A close study of these periods shows that price reverses frequently but not randomly. On any given day, bulls often like to see a price fall before bidding aggressively. Bears like to see a price rally before offering aggressively. The pre-market price will often reverse on the NYSE 9:30 opening bell; this includes the price of equities, debt, currencies, metals and energy. Markets are connected. The increase in liquidity at the open of the equity markets has an effect on multiple markets.

If you are an active equity trader, you need to follow other markets. Among your active screens should be the 30-year T-bond futures contract as well as an intermediate-term and a short-term interest rate futures contract. Next you should add currencies, metals and energy futures; at least one member from each group. Alternately, you could substitute these futures with exchange-traded funds. You should also watch multiple equity sectors.

By tracking multiple markets and sectors you will be able to see which markets and sectors are moving in the same direction. Buy and sell signals are stronger when the price of multiple markets/sectors are confirming a move (see “Checkerboard”).

On Friday, Sept. 26, the Nasdaq 100 and the S&P 500 rallied from 9:30 a.m. to just past 10:30 a.m. At that point, price faded. During the 12 p.m. period, price rallied a second time. During the 1 p.m. period, price faded a second time. During the 3 p.m. period, price rallied sharply.


Rallies and breaks during key time periods are not random. Traders whose size can move prices often make decisions based on the time of day. Traders who do not understand this are constantly buying high and selling low.

When it comes to directional bias, there are no definitive patterns. On any given day, price will not necessarily reverse during a given time period. The value of turning times is in alerting you to the possibility that price may reverse.

Each trading day multi-million dollar positions are entered in a keystroke. Imagine how all those mega-algorithmic trading programs are programmed. These market-movers are watching the clock. If price is breaking during the 12 p.m. period, the mega-traders may be counting the seconds to when they start buying during the 1 p.m. period.

On Friday, Sept. 26, during the 3 p.m. period, the S&P 500 reversed from the downside to the upside. Practically tick for tick, SHY, an interest rate exchange-traded fund, changed from a sideways pattern to a sharp break. SHY inversely confirmed the rally in the S&P 500. On that day, if all you did was wait for the 3 p.m. period, you would have caught a clean $1 move in SPY, the S&P 500 exchange-traded fund, with minimal risk. A long position of 1,000 shares would have netted a $1,000 profit for an hour’s work.

A lot can happen during the pre-market session, before the 9:30 NYSE open. A lot can happen during the period immediately after the open. Ignore both. Plan to begin your trading day around 10:15 a.m.

Price can reverse on the demarcation between the pre-market session and the 9:30 a.m. period. Price can reverse on the demarcation between the 9:30 a.m. and 10:30 a.m. periods. Each day’s buyers and sellers make their entrances at different times. This affects liquidity. Buyers and sellers take time getting a feel for the day, taking and switching sides. Riding this volatility can be mentally exhausting. Exhaustion can lead to mental rigidity. Your decision-making reflexes can slow, which can lead to mistakes.

Now, return to Friday, Sept. 26 . During the pre-market session, eurodollars were strong. There was an expectation the U.S. would cut short-term interest rates. On the open, the banking sector, which can drive the S&P 500, collapsed. Seconds later, aggressive S&P 500 buyers flooded the market. The banking sector rallied almost immediately. You would have watched this but done nothing. During the 10:30 period, the S&P 500 and banking sector faded. Because you know about turning times you still would have held your fire.

During the 12 p.m. period, the S&P 500 and the banking sector resumed their rally. Eurodollars, the S&P 500 and the banking sector were in synch. Time to trade. At a minimum, you would have gone long the S&P 500. Your long would have been profitable immediately. As the 3 p.m. period began, you would have ridden a fresh burst of buying. As 4 p.m. approached, you would have gone to cash and quit early. Your day was done.

Trade by the clock. Start late. Work hard. Quit early. This can be your life as a trader. You never know how a day may unfold but you are ready with a relatively simple approach. With this clock-watching technique, you will make more money some days than others. You will miss good trades that happen before 10:30 a.m. or after 4 p.m., but you also will miss the volatility that can come with those time periods.

Richard L. Muehlberg uses linear regression channels and intermarket analysis to day-trade. He publishes a day-trading diary on his Web site: E-mail him at

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