In this article, Mish Schneider, director of trading research and education at MarketGauge.com explains what a trader might learn from using a particular tool in their toolbox.
Tuesday was a choppy day for the market, which had sporadic price swings plus a large amount of volatility.
These days are tough to trade, as they can make it hard to see the daily trend direction.
One tool that can help you decide whether you want to trade the market or wait for things to unfold is the opening range (OR).
Tuesday, I used a 5-minute OR as a guide in order to see if the market was on my side or against me. A 5-minute OR is defined by the high and low of the first five minutes of the market open.
You can see an example of this in the chart above. Two lines are drawn; one for the high and one for the low of the first five minutes. This gives levels to watch for the price to clear or break down from.
Additionally, because of Monday’s large upwards price move in the major indices, my expectations for Tuesday were bullish.
Watching the major indices break over the high of their OR would confirm that the market agreed with my bullish stance.
However, the only major index to breaks its 5-min OR was the Dow Jones [DIA] around 9:58 ET. It was not a convincing breakout as it was the only major index to do so.
This proved that the next best thing to do was to sit and wait for multiple indices to break higher which never happened. Sometimes doing nothing is the best plan.
With that said, the OR is not perfect and there will be times when the market runs up only to turn around and move lower.
On another note, now that the market has taken a step back from Mondays gains the major indices are left in a strange spot between the highs and recent lows.
An exposed market might need some supportive news if it cannot clear Monday’s highs.
Without knowing when the next stimulus bill will pass or what Friday’s jobs report holds, today's choppy price action could easily continue.
Floorboards are creaking. Either the carpenter shows up or the floor gives way. Patience for now.
This article was originally published on MarketGauge. With over 100 years of combined market experience, MarketGauge's experts provide strategic information to help you achieve your investing goals.