Tape Reading II
Is price acting in accord with your game plan? When price is behaving as you expect, step up to the plate quickly and become more aggressive. There is a lot of noise on the tape, so do not watch so closely that you miss the forest for the trees. Look for confirmation that the anticipated big move is in play.
Watch for impulsive quick action following a breakout for an indication of urgency on the part of buyers or sellers. The pause or reaction after a breakout or after a sharp move should be shallow and brief. You don’t want the trapped side to get a chance to escape their positions without paying a price.
If you establish a position and feel that, for example, the market should be moving higher, but it is not, do not overstay your welcome. The tape is not confirming your game plan. Never hold out, hoping the market will do what you think it should do. There is a fine line between anticipation and fighting the tape. The price action will tell you right away whether your play is correct. The best trades work right away.
Many traders comment on how much easier it is to sense that the market is moving higher or lower once they have established a position. This is because there is now a reference point by which to gauge price. Another approach is to identify a pivot point and note whether the market is moving toward or away from that point.
Market Openings
During the first fifteen minutes of the day, consider yourself to be on a fact-finding mission. Much can be learned by observing how a market opens and how it first moves off the opening price. Usually, the first move of the day will be for the market to test the previous day’s high or low. The previous day’s high and low are important pivot points, for these are the levels at which buyers or sellers asserted themselves the day before. When the market is trending, look for the high or low to be broken early in the morning. When the market is in a congestion area, look to exit around the previous day’s high or low.
The current price relative to the opening price is a slightly better indication of the day’s trend than the current price relative to the previous day’s close.
Heavy volume at the opening indicates a probable trending day.
If there is a large opening gap, the larger the initial gap, the higher the odds that the price will trend in the direction of the gap.
If the gap is not an excessively large gap, the market will tend to partially fill the gap.
If the move off the opening price is unusually large, the first play should be to enter on a retracement of the initial move.
If the market has a very small range for the first hour, this indicates that the market is in equilibrium. Once price moves out of this range, there is potential for a trend day. Go with the breakout.
Monitor the opening price versus the pre-opening call. As with racetrack betting, the smart money will often come in only near the start of the race. For example, if the SPs are called to open up 5 but only open up 2, this is a sign of weakness and the market will most likely fall.
The Closing Hour
The last hour can tell the truth about how strong or weak the market really is. This is when big money is most likely to show its true hand. The market will move in the direction of the position they are holding.
High volume on the close implies continuation the next morning in the direction of the trend of the last half-hour.
On a light volume day, it is rare that the afternoon trend will be able to sustain itself into the close.
If the market makes a dramatic move in the last hour of a relatively lifeless day, be positioned in the direction of that move by the close. Hold this trade overnight, as there are very high odds of an opening gap in your favor the next morning.
In a bear market, short just before the last hour. Traders will rush out of the market near the close as it becomes clear that the market is not going to rally.
For downtrends to reverse, the market should have a lower opening or weak first hour, followed by a strong afternoon or last hour. If the market rallies only during the last 30 minutes, this most likely indicates short covering only.
Tape reading is not watching every trade that passes by (a monotonous task), but rather keeping an eye out for unusual price-volume activity, or just monitoring the way price trades at important levels. Each price swing has forecasting value which can help you anticipate the next, most immediate move. Follow price action to see if your anticipation plays out. Tape reading is at the heart of swing trading. If you are trading short-term swings, then derivative indicators will be too late to be of value. Ultimately, traders should feel a great sense of freedom when they can rely on simple charts to formulate a game plan or a conceptual roadmap, and on the movement of the tape to tell them that their game plan is correct.
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