Years of observation have taught experienced trader Larry Pesavento that the first deal of the day often acts as support or resistance for the whole session. In his book “Opening Price Principle: Best Kept Secret on Wall Street,” published in 2000, he reveals a remarkable tape reading method. The opening price theory has several applications, whether trading stocks or futures.
Which Markets Work Best?
Pesavento’s research focuses on S&P 500 index futures, although other liquid markets benefit from the methodology, particularly when intraday ranges are established. Currency crosses are a more difficult procedure to navigate since they trade in 24-hour cycles with no widely agreed-upon starting or closing prices. Nonetheless, the first forex print of the week—on Sunday night in the United States and Monday elsewhere—can be utilized for the same reason.
The theory works in a variety of ways, but it is most useful when price returns to challenge the starting print, from above or below, after establishing a morning trading range. Depending on volatility, this development might take anywhere from 30 minutes to two hours. Draw three lines across 5- or 15-minute charts, at the range high, range low, and opening print, once in place. The relative placement of these levels provides a wealth of helpful information and trading indications.
The most straightforward use occurs when price retraces to certain levels during the intraday session. Small-scale breakouts, breakdowns, reversals, and failures should be watched for and used as short-term entry and exit signals. It’s simpler than it seems since you’re searching for the same sort of behavior that would be anticipated at larger-scale support or resistance, either price expansion when the level is broken or a shove in the other direction when the level is held. The range high and low then act as trade filters based on their positions relative to the initial tick.
Let’s see how this works in two common intraday scenarios.
Image by Sabrina Jiang © Investopedia2021
The Invesco Nasdaq100 Trust (QQQ) opens at $102.54 and rises to $103.62 at 10:50 a.m. This set up a morning range, with the swing low coming at the same price as the opening print. Then a steady fall begins, prompting a test at the opening print in the midst of the lunch hour. The fund bounces for 30 minutes before rolling over and retesting the pivot at 1:20 p.m. The strong negative impetus indicates a breakdown, resulting in a severe intraday drop.
The failed lunchtime recovery completes a bearish cup and handle pattern, adding dependability to short positions established after price breaches the initial print and range low. It is crucial to remember that breaks resulting in large intraday movements may often be traded for many days since they function as resistance. Opening price breakouts exhibit similar patterns.
Image by Sabrina Jiang © Investopedia2021
On December 9, Gilead Sciences, Inc (GILD) shares opened at $103.50, with a morning range of $102.28 to $104.47. The opening print is placed between the session’s initial swing high and low, resulting in tape dynamics that vary from the QQQ example. In this situation, a breach of the first print should have less of an effect since there are higher and lower hurdles to mobility.
The morning range is established by the initial 5-minute bar, although this is not visible until it is successfully challenged for roughly 45 minutes into the trading day (red circle).The next upswing then challenges the initial tick, resulting in a breakout that adds more than 60 cents in the next 10 minutes. Price quickly stops at the range top, completes a bullish cup and handle pattern, and then explodes in a powerful directional push that fills the gap and continues till the closing bell.
The three data points offer structure to the customary morning turmoil, enabling you to implement your initial tactics as the bulk struggles to assess the market tone. This additional data produces a well-defined trading edge that adds predictive power in extremely short time frames, providing you a competitive advantage on the road to profitability.
The Bottom Line
In liquid markets, the first transaction of the day sets a tight price level that may operate as support or resistance throughout the session. When combined with the intraday trading range, this starting price theory has several uses.
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