A reader recently wrote to me asking a research question. It seems as
though a market commentator asserted that the S&P emini futures contract
(ES) either makes its high for the day or its low during the first hour of trade
on 71% of occasions. This struck my reader as a potentially useful piece
of information, but he wondered if it is accurate. So I decided to look.
This is not the first time I've investigated the timing of daily highs and
lows. Back in October, 2005 I wrote an article called "All Times of
Day Are Not Created Equal" (available on the articles
page of my website) in which I reviewed the prior 36 days of trading.
Having read Mark Fisher's book "The Logical Trader", I wanted to see the
odds of the market making its daily high or low during the first and last hour
of trade. The results were interesting. I found that the daily high
occurred during the first or last hour three-quarters of the time. The
daily low occurred during the first or last hour approximately 60% of the
time. Equally interesting, the midday hours only saw daily highs or lows
approximately 10% of the time, although they accounted for one-third of time in
the market.
The way I've used this information is to think in terms of "candidate
daily highs and lows". When we sell off sharply in the first hour or
run up significantly, I treat the high or low from that first hour as a
candidate daily extreme. I then monitor the day's volume as we go along to
estimate the market's likely range for the day. That gives me some clue as
to how much the market might move away from this daily extreme. On the
other hand, when we do make new highs or lows for the day during the midday
hours, I make the assumption that these will not be the ultimate day's highs or
lows. I then look for entries that will allow me to ride the trend into
the final hour.
Of course, a 36 session sample is not much to go on. Prodded by my
reader's inquiry, I went back to January, 2004 (N = 543 trading days) and
examined the number of occasions in which the day's high or low was registered
in the first hour. It turns out that we saw daily highs in the first hour
on 177 occasions and daily lows in the first hour on 179 occasions. All in
all, we saw either a daily high or low in the first hour about two-thirds of the
time. It's not quite the 71% quoted by my reader's source, but it's not
far from it.
So what can we do with this information? It seems to me that, if a
market makes its high or low in the first hour, it is rejecting that high or low
price as value. That rejection should manifest itself as significant
selling or buying following the candidate high or low. Once we see the
market hit a price extreme in the morning and then reject this with conviction,
we now have the basis for a trade idea. The first retracement from the
rejection move (i.e., the first bounce following a selloff from a candidate high
or the first dip following a rally from a candidate low) should provide a
relatively low risk entry for a short-term trend-following move.
A great deal of fruitful research could follow from this tendency. For
instance, we could examine the early signs of rejection of candidate highs and
lows so that these can be identified as quickly as possible. We can also
examine the risk/reward of holding trades that reject first hour extremes until
the final hour. Perhaps most intriguingly, we can explore whether this
pattern plays itself out in individual equities and conduct real-time scans for
signs of rejection of first-hour extremes to pursue this pattern among volatile
stocks. It seems to me the Trade
Ideas screening software should be ideal for such real-time inquiry.
(Please note that I have no proprietary interest in this or any other market
product or service). While historical patterns may not always play out in
the present, this one seems particularly durable. Stay tuned.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.
