Knowing how the market (or a stock) opens in relation to yesterday’s trading can give you a clue about what’s likely to happen for today’s trading. What are the three types of openings and what might they mean?
1. No Change
This is the most typical opening, where today’s open is either equal or very close to yesterday’s close.
When this happens, it increases the chance that the day will be more neutral or rangebound, and decreases the chance that the day will be a trend day.
2. Gap, But Within Yesterday’s Range
When a market gaps up or down, it is indicative that there has been some sort of supply/demand imbalance that has changed overnight. Perhaps it was a news announcement or some other stimulus, but the gap is not too distant from yesterday’s close.
It is often better to trade against the gap, betting that it will ‘fill,’ which can establish an early morning trade. These instances increase the odds that a gap will fill.
Also, odds still favor some sort of consolidation (or rangebound) day, but the odds for a trend day are slightly higher than for the typical (no change) opening.
3. Gap Outside Yesterday’s Range
Gaps of this nature show potentially significant supply/demand imbalance, or that a major announcement or event has changed the calculus of traders’ expectations. Perhaps one side is being ’squeezed’ and that the other side is showing dominance.
Gaps outside yesterday’s range have lower odds of filling, especially if they occur significantly outside yesterday’s range.
Such gaps increase the odds that the day’s trading will lead to a trend day, where the market (a stock) will open at one extreme and close on the other extreme. The odds that the day will resolve into a trading range are much lower than the other types of openings.
The type of morning opening gives you clues about what is likely to happen (or not happen) for the rest of the trading day.
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