ift that nets a total of 4.6 points in the direction ofthe opening price, and a maximum potential profit of 21 points by entering a positionbetween 9:20 and 10:00 and then liquidating between 10:00 and 11:00. During the testperiod, the magnitude of the cattle move did not appear worth the risk, but the same pat-tern might be profitably traded in a market with higher value per point.
When tying to find other market patterns, it might be best to observe only stronger orweaker openings. For example, a gap open of 5 to 20 points in cattle would indicate 2potentially more volatile day allowing greater price reactions. More uniform results can beexpected as seen in both the reversal patterns and gap analysis, which appear later in this
—_———
TABLE [5-3 Time Reversal Patterns*
 
905 _ 76 9:35 38 10:05 35 319:10 27 9:40 32 10:10 38 38915 38 9:45 39 10:15 40 369:20 40 9:50 42 10:30 40 329:25 45 9:55 37 10:45 40 39
+ 930 4l 40:00 36 11:00 33 32 OT4l
 
*A more recent look at june 1976 cattle showed very similar results. 
 
 
388 PATTERN RECOGNITION
FIGURE 15-3 Cattle pricé ranges, 9:20-1 1:00 a.m.
COMBINED RANGES (b) and {c)FOR STRONG OPEN
2
=
RANGE (points)
 
9 10 nTIME OF DAY
 
chapter, Restricting trading to days of higher volatility will reduce the trading opportuni-ties but improve results.
Trading the Early Patterns
The best opportunity for trading against the trend would be 5 minutes after the open. Theopening momentum that carries prices further in the opening direction can be used toadvantage without waiting. After 20 or 30 minutes, the opening reversal should haveoccurred, and a trade may be entered in the same direction as the opening but at a morefavorable price.
Relating the Opening Trade to the Prior Day .
‘Another analysis performed on the time pattern chart was a correlation to determinewhether the period from market open to 9:20 (15 minutes), related to the prior day’sdirection, could help predict the direction of the tides during the current day. The 15-minute interval was chosen as sufficient time to react to results and place an order. The__two situations distinguished were the relationship of the first trade to the prior day's direc-tion and the direction of the early trading, using the first 15 minutes. Because the same 76——————TABLE 15-4 Summarized Time Data
‘Average Additive _ Points Moved in —
 
Time Volatility Bias + ‘Direction of Openire ky ———e—a. Open-9:20 173 +49 +44b. 14300 415 +6« 1420437 +39 -d. 2748.3 +46e. 8 472 ~ 433 .£ 12:00-Close 19.6 +32 “12
 
TIME OF DAY 389
 
days of cattle trading were used, it should be noted that the conclusions are based on asmall sample. Even though they are believed to be valid, there should be some variationbetween these results and those based on a large sample.
Four cases were observed using the time intervals shown in Table 15-5. The percent-ages are calculated as the likelihood of movement in a specific direction relative to the con-ditions of the opening price and opening interval:
1. The opening price continued in the same direction as the prior day’s open-to-closedirection.
2. The opening 15-minute interval was consistent with the direction of the openingprice as in (1).
3. The opening price and opening interval both continued the direction of the priorday.
4, The opening price and opening interval both continued opposite to the directionof the prior day.
Note that most of the intervals observed moved opposite to the opening price direc-tion, This will support the more extensive work in the tables of reversal patterns and gapanalysis. The two most extreme entries are the 39% in (1) and the 35% in (3). The firstshows that by 9:20 there have been reversals 61% of the time, further supporting the pre-vious conclusions. The second case, in (3), shows that an opening price and opening inter-val that continues in the direction of the prior close has reversed 65% of the time in the10:00-to-11:00 a.m. interval.
Highs and Lows of the Day
In selecting a place to enter the market for a single-day trade, it would be a great advantageto know the time of day at which the highest or lowest price is likely to occur. To under-stand this, Figure 15-4 presents a combined tabulation of both the daily highs and lowspositioned at the time they occurred. The pattern clearly indicates that the opening andclosing ranges are most likely to be the highest or lowest price, with 11:00 as the only mid-day alternative. No attempt was made to determine whether a high at the open had a lowat 11:00 or at the close, nor was any relative positioning of the high-low observed. Separatecharts of only highs and only lows proved that there was no distinction in the patterns—highs were just as likely to occur at the three peaks as were lows.
There are simple ways in which this small piece of information could be of advantage.After the opening range has been formed, watch for the breakout of the range and assumethe other direction is a high or low. In the example, the breakout will occur to the upside,and the bottom of the range will be considered the daily low. Buy the opening breakout
 
TABLE [5-5 Likelihood of Movement in the SameDirection as the Open
 
Cases@) (2) 3) (439% _ — _52% 57% 58% 50%43% 40% 35% 48%45% 47% 43% 48%43% 49% 43% 4%12:00-Close 46% 53% 48% 42%
 — & 390 PATTERN RECOGNITION t TIME OF DAY
i STFIGURE 15-4 Combined dccurrence of highs and lows. i FIGURE 5-5 Intraday distribution of highs and lows. (a) Eurodollars. () Japanese yen(©) Deutschemarks. (d) U.S. Treasury bonds. (e) S&P 500. (f) Coffee. .
 
15-minute Eurodollar (Mar 92-Feb 94)100 40
40
 
 
2$
 
 
 
3020
‘% highs and lows8
&
 
 
‘% new highs and lows
 
 
20
‘Cumul
20
  
 
 
FREQUENCY OF OCCURRENCE
   
1220,1250 fu132601350,14201450.
gs 88
Time of day
820856926950
— Cumulative J High I Low~ (a)
   
 
 
9 9 10 10% 1h 19 1200«12% 1TIME OF DAY 15-minute Japanese yen (Mar 92-Feb 94)el - 100 20
with a stop below the opening range. Look for the high of the day at 11:00. If there is a testthat the resistance will hold. If there
of the highs at 11:00, liquidate the position assumingis another upside breakout, buy again in anticipation of the highs of the day at the close. Ifno test of the highs occurs at 11:00, hold the position until the close; if support is broken, :
close out or reverse and expect the lows of the day at the close. .
 
 
 
A Recent Look at the Timing of Intraday Highs and Lows
Since the timing of cattle was studied more than 20 years ago, we might expect the fre-quency of occurrence of highs and lows to have changed, but that is not so. The first 15+ minutes of the day still account for a large percentage of the highs and lows, and the clos-: ~ ing 15 minutes is the next most likely time, and somewhere around the middle of the dayi is the third most popular. But this is primarily a domestic market, compared with Eurodol-lars or the S&P 00, which attracts a significant world participation. In the case of curren-cies, most trading begins when the London markets open, at about 2:00 .m., Chicago time,about 5 hours.ahead of the CME’s International Monetary Market open. By the time the— ? United States makes its first trade, prices could have moved far from the previous U.S. set- — Cumulative BJ High Bf Lowtlement based-on a half-day of business activity in Europe, and a gap opening simply putsU.S. prices in line with the rest of the world. (b)
% new highs and lows
 
Cumulative % highs and lows
l
 
 
   
- Time of day
 
 
a it should not be a surprise if price patterns have changed during the globalization of
hed the past 10 years, With data more readily available, a selection of major markets could be ;
low sampled for 15-minute intervals and plotted to show the distribution of highs, lows, and _
asti the cumulative combination of highs and lows (see Figure 15-5) for the 3-year period from -- March 1992 through February 1994, The results are very similar although the markets are
 
beter 
 
 
)394 PATTERN RECOGNITION
Trading Decisions .For markets such as the Deutschemark, which has a steady chance of posting a new high orlow anytime after the first 15 minutes (remember that this interval includes any reaction toUS. economic data that is released 10 minutes after the open), trading could be approached.by deciding, after 15 minutes, whether the market has already made a high or a low for theday. For example, if an economic report indicates a weak dollar, and the price of the D-markjumps 50 ticks, we could reasonably assume that we have seen the lows of the day. If pricesmake a new high during the next 15 minutes, we are even more likely to have seen the lowsin the first 15 minutes. It is possible that we have seen both the lows and the highs, but it wasthe lows only that occurred at the most common time. If we assume that the high can occuranytime during the day, then buying sooner will give more opportunity to profit by the endof the day.
You can increase the confidence in your decision by waiting about 2 hours into thetrading day, when most markers have a 50% chance of seeing a high or a low already estab-lished. While this may make it easier to identify the correct extreme, it reduces the oppor-tunity for profit by the end of the trading day. A projection of volatility, which can bereasonably constant for many markets, could help decide whether there is enough oppor-tunity to enter a trade.
OPENING GAPS AND INTRADAY PATTERNS
The daily price fluctuations and intraday patterns of a market may be related to thestrength or weakness of the daily opening. A large gap opening implies greater volatility forthe day, positions prices for a greater reaction, and may show more consistency in the sub-sequent intraday patterns than a market that opens nearly unchanged. A gap analysis wasperformed to study the combination of patterns that could be traded profitably. A strongopen followed by a stronger close would allow a trader to buy ona pullback after the open,while a consistently weak close after a strong open would be an opportunity to set a shortposition. Specific entry timing can be improved by using the patterns discussed in the pre-vious section.The gap analyses for the six diverse markets shown in Table 15-6 are separated intotwo parts:1. The position of the closing price following a gap opening. .a. The close continued (extended the move) in the direction of the gap.b. The close was between the gap opening and the prior close.¢. The close reversed the direction of the opening gap (thathigher, the close was lower).2. The type of trading range pattern that occurred. —_a. Prices crossed the pfior closing price at least once during the trading session.b. Prices reversed from the open but did not cross the prior close.©. Prices continued in the direction of the open.and never reversed.
In addition, a record is shown of the percentage of times that price continued on the fol-Jowing open in the same direction as the current gap. ~~
Using the Deutschemark as an example, we see that the gaps ranged from +1.00 to1.00 in IMM notation. The values in each of the columns, except for the far right column,are the percentage of occurrences based on the total cases, shown on the right. The num-ber of cases show a typical price distribution, clustered near the smaller gaps, with anextended tail at the extremes. All gaps greater than +1.00 were included in the top row, allgaps less than -1.00 are included in the bottom row. The interesting patterns in theDeutschemark results are:
 
if the open was
 
 
 
i
= $$TABLE 15-6 Gap Analyses, January 1986-February 1996*
 
 
 
 
 
 
 
Closing Price Trading Range Cont NoCont Below Rev Cross Adj fr Cont Next of
Gap Dir Open Dir Pr Cls_—Open Only Doy Cases
(a) Deutschemark
1.000 60 40 ° ° 100 ° 50 100.900 60 40 0 ° 100 0 40 50.800 64 27 9 13 73 9 36 "0.700 58 38 4 8 88 4 58 260.600 64 24 6 6 a 3 48 330.500 58 34 5 15 82 2 37 620.400 54 30 1s 28 65 6 58 1020.300 55 23 16 34 6 5 50 1730.200 45 20 28 58 7 4 48 2850.100 3! 5 38 81 10 6 45 4480.000 0 0 ° 0 0 0 0 790.100 46 6 45 84 WW 2 56 474-0.200 44 2 33 63 32 2 52 3390.300 4B 33 2 44 52 ° 53 2080.400 45 4 8 24 77 1 51 103,0.500 55 32 6 15 80 3 42 65~0.600 43 45 13 18 78 5 45 400.700 63 32 5 NW a4 5 58 190.800 70 20 10 10 80 10 50 100.900 25 75 ° 0 100 0 50 41.000 47 33 ° 6 88 6 53 7Closing Price Trading Range Cont No.Cont Below Rev Cross Adj fr Cont Next of
Gap Dir Open Dir PrvCls__—_ Open Only Day Cases
(b) S&P 500
5.000 58 37 5 16 84 0 53 19
4.500 20 40 40 60 40 ° 20 Ss.4.000 87 14 4 43 57 0 43 73.500 55 45. ° 18 82 ° 36 u3.000 44 2 33 33 56 0 ut 92.500 59 29 12 29 7 0 59 72.000 42 7 3 56 44 0 52 851.500 87 18 21 58 36 6 87 1501,000 5I lo 36 78 16 5 47 30.500 5I- 4 43 90 5 3 45 4310.000 0 0 0 0 ° 0 0 1850.500 44 3 51 2 4 2 5S 6261.000 46 10 4 76 18 3 51 300-1.500 48 ig ~ 31 39 35 — 3 33 122-2.000 45 23 3m 55 34 9 55 74=2.500 32 38 27 SI 43 s 62 373.000 35 35 30 50 35 1S 45 203.500 78 u "1 u 89 0 28 184.000 13 38 50 63 25 13 50 84.500 75 25 0 25 7S 0 50 4-8.000 46 -21 25 Ad 42 7 50 24
* Values are shown as percentage of cases in each line category.(continued)
395 
 
 
——
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TABLE 15-6 (Continued) TABLE 15-6 (Continued)\_ Closing Price Trading Range Cont No. Closing Price Trading Range Cont No.Cont Below Rev Cross Adj fr Cont, Next of Cont Below Rev Cross Adj fr Cont Next ofGop Dir ‘Open Dir -PrvCls_ Open Only Day Cases | Gop Dir Open Dir PrvCls_ Open Only Doy Cases: (o US.Treasury bonds | (e) Goldi 1.250 54 46 ° 8 85 8 38 13 52 39 7 23 75 2 66 444 1.125, 0 100 0 0 100 oO 100 2 i 47 35, 18 29 7 0 7 I7. 1.000 so 17 33 50 33 17 67 6 57 35 9 22 70 4 43 23: 0.875 40 30 20 40 60 oO 30 10 } 68 24 4 24 72 4 52 250.750 29 24 47 7m 24 6 47 7 j 50 34 13 38 so 13 56 320.625 53 29 (8 35 65 ° 53 7 ; 42 40 18 40 56 2 44 555 0.500 35 29 32 65 29 6 47 34 55 24 20 38 St 7 48 840.375 43 25 26 70 21 4 46 a4 a7 ‘9 30 sé 38 5 40 \780.250 50 2 4 69 20 6 55 235 52 \4 30 6t 27 9 “4 3080.125 52 2 38 86 4 6 53 724 49 4 8 80 7 8 39 3340,000 0 0 0 0 0 ° ) 321 ! ° 9 9° ° 0 0 9 1080.125 47 2 43 85 5 4 47 613 ' 4 3 48 a 4 ' 52 3580.250 si 8 7 75 14 8 49 245, | 45 \7 33 66 27 ! 53 326~0.375 49 7 33 55 33 8 49 83 42 29 28 $3 4l 3 49 197~0.500 36 33 28 6t 36 ° 53 36 7 4 26 48 al ' 55 1282 0.625 ° 39 35 26 a 5200 4 30 23 ar 52 4 37 57 ' 4l 86: 0.750 30 50 20 30 70 ° 50 10 43 43 ts 2s 74 2 54 6!0.875 50 30 20 40 60 ° 50 10 38 3 7 38 5s 2 “4 2=1.000 ° 67 17 17 3 67 0 2 12 25 8 13 38 8 ° “4 161.125 67 ° Oo oO 100 oO 100 3 44 39 7 28 72 9 6 ie44 53 3 7 90 3 53 59=1.250 30 60 10 10 90 ° 60 10 :Closing Price Trading Range Cont No ——_Sesing Price ____ Trading Range Cont No.Cont ‘Below —*Rev' «= Cross. =A fF ~—=SsCCont.=SsNext of “ont Below Rew 5s. ss fr font vor a fGop Dir Open Dir PrvCis Open Only Doy Cases il pen ir rm pen ry ey ses. (¢) Heating oil (f Soybeans0.020 27 38 13 28 58 19 90 48 37 30 \4 23 60 7 59 70. 63 19- 13 25 63 13 56 160.018 #0 20 40 60 40 ° 80 5 4l 35 24 41 4l 18 4400 70.016 33 50 17 25 42 8 ‘so 12 53 9 ia 35 4 12 4 7i 0.014 25 13 63 63 38 oO 38 8 52 18 25 34 52 14 48 44{ 0.012 54 7 10 20 66 12 56 4l - 52 15 > 38 7 B $3 60: 0.010 26 47 21 32 38 u 37 19 82 5 20 9 40 8 2 103i 0.008 48 26 18 4B 48 8 52 ét 48 Bey 2s “4 4 a 46 158q 0.006 48 24 22 40 45 7 50 164 44 9 40 nR 16 7 45 295z 0.004 44 13 32 52 28 fo. 46 301 53 2 39 86 2 7 4 347# 0.002 49 4 35 66 6 15 43 407 0 0 0 0 0 0 0 192.0.000 0 ° o- 0 o 0 o 266 49 3 44 8s 3 8 53 355- —0,002 4t 3 40° 78 4 4 55 462 50 9 35 7 14 9 50 3590.004 39 4 33 60 25 5 48 ~ il 49 16 3 60 4 10 54 - 1at0.006 4i 28 24 460-41 4 5S 184 ~ 53 23 21 499 36 12 46 1030.008 42 30 20 34 st 7 52 89 5} 18 26 46 33 1s 3 390.010 50 29 17 29 63 4 42 247 33 28 19 50 31 14 33 360.012 49 28 15 31 62 3 SI 39 53 7 1s 42 42 1s 46 260.014 50 50 0 13 7S 13 63 8 35 39 6 29 59 6 35 17- 0.016 60 20 20 20 80 0 40 5 45 7 13 27 64 9 55 i0.018 67 0 33 33 67 oO +0 3 62 17 130 - 19 59 22 S7 630.020 46 21 1s 21 64 {5 6 39307
396
    
 
398 PATTERN RECOGNITION
 
1. “Cont Only” shows that the chance of the market continuing in the same direction,
hout a pullback, is extremely small; therefore, a market that gaps up and contin-ues higher should be sold, expecting prices to fall below the open. |
2. Except for sharply lower opens and quiet opens, there is a greater chance that theclosing price will continue the direction of the opening gap and a relatively smallchance that prices will reverse and close through the level of the prior closing price.This presents an opportunity to buy after a gap and a pullback. For example, ahigher gap of 60 points has a 91% chance of a pullback, only a 6% chance of a clos-ing reversal, and a 64% chance of a stronger close. A lower gap of 40 points has a77% chance of a rally above the open, a small chance of a close above yesterday'sclose, but only an equal chance of a weak close for the day.
3. The most extreme gaps, both higher and lower, are always interesting. For theDeutschemark there seems to be no bias in the pattern over the past 10 years. Noneof the extreme moves shows a tendency to continue in a predictable direction, butnone of them reversed on the close. This would indicate that extreme gaps do notmark the end of a move.
 
Some of the interesting features of the other markets in Table.15-6 are:
S&P 500
‘The percentagé of time that S&P prices cross the previous closing price, or reverse direc-tion on the close, indicates that it has much more noise than Deutschemarks and mostother markets. A unique pattern of the S&P is that large upward gaps always trade lowerwhile large downward gaps have occasions when prices just-keep falling.
Treasury Bonds ‘‘This market, as with the S&P has had an upward bias during the past 10 years; therefore,the symmetry of the patterns may be affected. For bonds it is interesting to view the smallgap open, for example .125 equal to %:. There is an 86% chance that prices will cross theprior close during trading, but a much smaller chance (38%) that prices will close lower.The 52% chance that prices will close above the open creates an opportunity for buying,provided risk can be controlled.
\Heating Oil
Expressed in cents per gallon (-020 is 2 cents), this study shows a large number of extremegaps exceeding 2 cents. When those gaps are higher there is a strong tendency to continueon the next open.
Soybeans .
The extremes of soybeans, as with some other markets, show a tendency to continue thenext day. Large gaps down are more likely to be consistently lower, while upward gaps areless consistent during the day.
Gap Study ProgramThe following Omega Easy Language program is easily converted to other programminglanguages. It can be used to evaluate gap opening of any market based on daily prices. Theresults are printed to a flat file called “gapout” stored in the Windows directory. Note thatthe results are given as the number of cases satisfying each condition rather than the per-centages seen in Table 15-6. To print the percentages, simply multiple the value by 100 anddivide by the number of total cases (ni tems) in the print statement.
OPENING GAPS Al. _ {NTRADAY PATTERNS 399
 
(SYSTEM: Gap Study}(Copyright 1978-1998. PJ Kaufman. All rights reserved.|Inputs: gapiner(0), nbars(20);vars: ix(O), m(O), n2(0), min(O), gap(O), ngap(O}, middle(O);arrays: maxmin(50)(0), ccont