Opening Types and Trader Confidence

[Soultrader]

It was not until Markets In Profile that Dalton really woke my eyes up on trader confidence in market direction, especially at the opening. For all Mind Over Markets readers, I am sure we are familiar with the following:

1. Open-Drive
2. Open-Test-Drive
3. Open-Rejection-Reverse
4. Open-Auction

The amount of confidence differs from each of the following opening types. It is important to understand the differences.

What caught my attention was the Open-Rejection-Reverse type opening in which price exceeds the previous days low/high. However, price is rejected and returns within the previous days range. This phenomenon is a good opportunity to go with the reversal trend as price has a tendency to seek the opposite extreme. How many times have we seen the ER2 or YM break the previous days lows but rally in the afternoon to close near the high of the range? What traders can do is to go with this reversal trend as soon as price re-enters the previous days range.

Now the open-test drive is a concept that I am very well familiar with and relates to an opening setup I use everyday. The open-test drives simply refers to price opening up and testing a known reference point to test for sellers and buyers. For example, price opens above value and tests the overnight high which is a few points away. Sellers step in and drives price back into value and possibly to test the lower end of value. My opening setup is very similar. When price opens and there is any reference point near it (daily pivot, VAH, VAL, weekly pivot, monthly pivot, previous day low/high, overnight high/low, etc...) look to fade this move at the pivot when confirmed on tape.

Now let's go back to trader confidence. Dalton once again brings up a great question: "What is the market attempting to do, and what grade does it get for its effort?"

This is where market profile really comes in handy. The picture of the profile tells it all. Let's say price opens and immediately declines and appears to be a downtrending day. The opening shows a open-drive. However, the 5th and 6th 30minute period is unable to break or test the low created by the 4th 30minute period. In other words the profile would look like this:

A (open)
A
A
A
AB
B
B
BC
BC
C
C
CD
DEF
DEF
DEF
DE
D
D

Notice how E and F period are trading above D period. What does market confidence tell us? Is the market doing a good job trying to auction lower? Or are we seeing some kind of long liquidation but yet an accumulation at the same time? If we try to visualize a complete profile, we can clearly see value area starting to develop and a "b" shaped profile in the making.

How is this information important to trader?

Well if you were short from the A-D period you will know that the short risk becomes greater. In other words the potential for further downside movement diminishes. Hence instead of waiting for the markets to stop you out, it might be a wiser decision to exit according to what the market is telling you. Also, if the following day exhibits a "P" profile, this would indicate a short covering and a potential lower on the 3rd day. However, if the market balances on the following day... perhaps the market has potenitla to the upside? Of course as a trader there are many elements that you need to watch on top of this. Such as: volume at the lows of D period, any reference point at the lows, if D period lows become a single print tail, etc...

Please feel free to elaborate on this concept. I think alot of new insights can be born.

[TinGull]

Before I formulate an elaboration...how weird!! I was re-reading that section last night in MiP. So weird...

[TinGull]

Yesterday I think was a pretty good example of an open test drive. The market went down about 15 points off the open to search out those pre-market sellers...but found nothing. This was signaling that confidence was not as high as it could be. Then...YM sold off in the afternoon. Was it a little obvious (the selling) knowing the confidence at the opening wasn't as strong as it could be? Sure...I think so. Unlike the second photo I attached, where YM went up just 3 points before heading....about 400 points lower.

So...I think if nothing else, knowing the opening types is good for helping to discern the direction of the afternoon action.

[Soultrader]

Nice example Tingull. How would you of detected the late afternoon sell-off? Wouldnt there be more confidence to the upside?

[TinGull]

Yesterday you can see that price traded to the S1midpoint monthly pivot at 12188 and then made a double top around 11:30 while exceeding that by just a few ticks. Tried to search out more buyers, but when price realized there was nothin to be had....bam. It's starting to happen right now in the markets, so will be interesting to see how the rest of the afternoon pans out.