a number of reasons for the regular movement of prices. Because most ofthe daily volume is the result of day trades, those positions entered in the morning will beclosed out by the afternoon to avoid the need for the margin required of positions heldovernight. Orders that originate off the floor are the result of overnight analysis and areexecuted at the open. Scalpers and floor traders who hold trades for only a few minutesfrequently have a midmorning coffee break together, this narural phenomenon causes liq-uidity to decline and may result in a temporary price feversal. All traders develop habits oftrading at particular times. Some prefer the opening, others 10 minutes after the open.Large funds and managed accounts will have a specific procedure for entering the market,such as using close-only orders.
A day trader must watch certain key times. The opening moments of trading are nor-mally used to assess the situation. A floor trader will sell a strong open and buy a weak one;this means the trade must be evened-up later and thus reinforces the opening direction.On a strong open without a downward reaction, all local selling is absorbed by the marketand later attempts of the locals to liquidate will hold prices up. In any event, floor tradesTIME OF DAY 385
 
can be expected to take the opposite position to the opening direction, usually causing areversal early in the session.
Tubbs’ Stock Market Correspondence Lessons, Chapter 13, explains the dominant pat-terns in the stock market (given a 10:00 a.m.-to—3:00 PM. session).
1. If a rally after the open has returned to the opening price by 1:00, the day is ex-pected to close weaker.
2. If the market is strong from 11:00 to 12:00, it will continue from 12:00 to 1:00.
3. Ifa reversal from 1:00 to 1:30 finds support at 1:30, it will close strong.
4. If the market has been bullish until 2:00, it will probably continue until the closeand into the next day.
5. Arally that continues for 2 or 3 days as in (4) will most likely end on an 11:00 re-versal.
6. In general, a late afternoon reaction down after a strong day shows a pending re-versal.
Putting these together, the following patterns (among others) can be expected:
1. A strong open with a reversal at 11:00 not reaching the opening price, then strengthfrom 11:00 to 1:00, a short reversal until 1:30, and then a strong close; according to(5), another strong open the following day.
2. A strong open that reverses by 11:00, continuing lower until 1:00, reverses againuntil 1:30, and then closes weak.
Merrill’s work shows the hourly pattern of the stock market in Table 15-1. The gridclearly indicates a bullish bias with 1963 the most obvious. The pattern is uniform and sim-ilar to what would be expected: early trending, an adjustment, then a wave of down-up-down. Contrary to commodities, these 4 years show extremely consistent strength on theopening with a sell-off on the close. Commodity prices may have regular patterns, butthese patterns will occur with downward moves as well as upward ones. It is just as likelyto see an opening sell-off with a rally on the close.
For commodities, the patterns are similar but may be compacted, as in the case of agri-cultural products, due to shorter, earlier hours (9:30 a.m. to 1:15 pM. for most Chicagograins and livestock), or shifted as with currencies that open earlier. Knowing the dailytime patterns would not only help a day trader but would also aid any speculator to enteran order at a better place. Figure 15-2 shows the time pattern for the Chicago MercantileExchange live cattle contract (open from 9:05 A.M. to 12:45 PM.). Seventy-six consecutivetrading days were tabulated for the June 75 contract from February 1 through May 31,1975, an active period for cattle. The left scale of the chart shows the frequency of occur-rences and the bottom shows the time of day. A line appearing in the top half of the chartindicates price movement in the direction of the opening price (from the prior close); thelower half shows a reversal trend. Measurements were first taken every 5 minutes and laterevery 15 minutes, due to a more variable price direction near the open.
 
TABLE 15-1 Merrill’s Hourly Stock Market Patterns
Time during Trading Session
 
 
10:00 11:00 12:00 1:00 2:00 3:001962 - + - .7 -1963 + + + + + =1964 + + - + -1965 + + - - - ~386 PATTERN RECOGNITION
 
Figure 15-2 shows that follow-through in the direction of the opening price slowsdown immediately and by 9:30, 25 minutes after the open, the price direction has usuallyreversed. There is a subsequent steady change in direction back and forth throughout theday. This pattern is remarkably similar to Merrill's stock market observations.
By showing two consecutive days of cattle price movement, Table 15-2 demonstrateshow the data was accumulated. Although the table actually used 5-minute intervals from9:00 to 10:15 and then 15-minute intervals from 10:15 until the close at 12:45, Table 15-2is summarized in half-hour increments. If Friday’s closing price was 45.00, Monday's openof 45.15 was indicated by a “+” for absolute direction and an O for opening direction. Anyhalf-hour interval showing a price rise was marked with the relational symbol O and areversal with an X. Tuesday opened lower, but the opening direction is still given as an O.Every interval that followed with lower prices is in the opening direction and is marked O.Adding the 76 test days together resulted in the scores shown in Table 15-3.
Knowing the direction of the price movement does not mean that trading these inter-vals will be profitable. To evaluate the potential, it is necessary to know the approximatesize of the price move; the interval can then be selected with the greatest potential formovement in the direction of the time-of-day pattern. By observing Figure 15-2, the inter-vals to study can be picked from the tops and bottoms of the cycles:
 
__ Selected Time Intervals
a. Opening to 9:20b. 9:20 to 10:00
¢. 10:00 to 11:00d, 9:20 to 11:00
e@. 9:20 to 12:00
f. 12.00 to closing
 
 
FIGURE [5-2 Intraday time patterns, June 75 cattle.
 
9 ” 10 10% " Ww. 12 12°TIME OF DAY - 387
 
 
 
 
TABLE 15-2 Accumulating Time-of-Day DataDirection DirectionTime Price from Last from OpenMonday9:05 (I) 45.15 °9:30 2) 45.25 °@) 45.10 ~ x10:30 (4) 45.05 ~ x11:00 (5) 45.20 + °11:30 (6) 45.30 + °12:00 ”) 45.40 + °12:30 (8) 45.30 ~ xTuesday
9:05 (9) 45.25 ~ °9:30 (10) 45.35 + x10:00 (11) 45.45 + x10:30 (12) 45.40 ~ oO11:00 (13) 45.50 + x11:30 (14) 45.40 ~ °12:00 (15) 45.20 ~ °12:30 ; (16) 45.05 ~ °
 
For each interval, the average range from high to low (volatility) and the net result ofthis span (additive bias) were measured without considering the relative direction thatwas used to create the curve of time patterns. The results, shown in Table 15-4, indicatethat the narrowest ranges, (b) and (c), were early in the day moving only a total of 14points. The combined period (d) was 21.7 points, 50% greater than the individual periods(b) and (c). Figure 15-3 describes the likely combination of the intervals.
The results show a midmorning drift 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 trying 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 apotentially 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 Wls 319:10 27 9:40 32 10:10 38 11:30 38HIS 38 9:45 39 1o15 40 1:45 369:20 40 9:50 42 10:30 40 12:00 329:25 45 9:55 37 10:45 40 1215, 39
- 9:30 4l 10;00 36 11:00 33 12:30 | 3207- Close 4l
nn*A more recent look at june 1976 cattle showed very similar results.388 PATTERN RECOGNITION
 
 
FIGURE 15-3 Cattle pricé ranges, 9:20-11:00 a.m.
COMBINED RANGES (b) and (c)FOR STRONG OPEN
RANGE {points}
 
g70 10 WTIME 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 SummarizedTime Data __Average Additive Points Moved in —
Time Volatility Bias “Direction of Opena. Open-9:20 «173 449 +44b. 9:20-10:00 1430415 +6c. 1000-1100 14.2 43.7 43.9 ~d, 9:20-1:00 217453 +46e. 9:20-1200 258 472 “ 433f 12:00-Close 19.6 43.2 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 variationberween 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 15-5 Likelihood of Movement in the SameDirection as the Open
 
 
Cases(0) (2) (3) 4)Open-9:20 39% _ _ _9:20-10:00 52% 57% 58% 50%10:00-1 1:00 43% 40% 35% 48%9:00—1 1:00 45% AT% 43% 48%9:20-12:00 43% 49% 43% AA%
12:00-Close 46% 53% 48% 42%390 PATTERN RECOGNITION
 
 
FIGURE 15-4 Combined occurrence of highs and lows.
FREQUENCY OF OCCURRENCE
 
 
9. 9 10-109 at w4200«12% 1TIME OF DAY
 
with a stop below the opening range. Look for the high of the day at 11:00. If there is a testof the highs at 11:00, liquidate the position assuming that the resistance will hold. If thereis 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 15minutes 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 dayis the third most popular. But this is primarily a domestic market, compared with Eurodol-lars or the S&P 500, which attracts a significant world participation. In the case of curren-cies, mast trading begins when the London markets open, at about 2:00 A.m., Chicago time,about 5 hours_ahead of the CME’s International Monetary Market open. By the time theUnited States makes its first trade, prices could have moved far from the previous U.S. set-tlement 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.
It should not be a surprise if price patterns have changed during the globalization ofthe past 10 years. With data more readily available, a selection of major markets could besampled for 15-minute intervals and plotted to show the distribution of highs, lows, andthe cumulative combination of highs and lows (see Figure 15-5) for the 3-year period fromMarch 1992 through February 1994. The results are very similar although the markets are}TIME OF DAY : 391—SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS——
a PPFIGURE 15-5 Intraday distribution of highs and lows. (a) Eurodoilars. (b) Japanese yen.
(¢) Deutschemarks. (d) U.S. Treasury bonds. (e) S&P 500. (f) Coffee.
 
15-minute Eurodollar (Mar 92-Feb 94)
 
 
 
    
 
 
   
 
 
 
100 [ 40s 2£0 z2 22% 22 4 =s 2é 10 ®8 200 a5 An 0So 'D oO oS 'o oO ‘oO oO o 'o 'o 2 ‘o f=}8esoe08 8 F PRS BeeTime of day— Cumulative QR High I Low7 (a)15-minute Japanese yen (Mar 92-Feb 94)
2
8 9= 2= 22 zs 2z z5
3G
 
 
qj52
12212501320 fer1350.1420 fai1450
- Time of day
— Cumulative High Low(b)
 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 toU.S. economic data that is released 10 minutes after the open), trading could be approachedby 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 markets 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 GAPSAND 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 on a 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.c. The close reversed the direction of the opening gap (that is, if the open washigher, the close was lower).2. The type of trading range pattern that occurred. _a. Prices crossed the prior closing price at least once during the trading session.b. Prices reversed from the open but did not cross the prior close.c. 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-lowing open in the same direction as the current gap. ~~
Using the Deutschemark as an example, we see that the gaps ranged from +1.00 to-1.00 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: 
}
eeTABLE 15-6 Gap Analyses, January 1986-February 1996*
 
 
 
 
 
 
 
Closing Price Trading Range Cont No.Cont Below Rev Cross Adj fr Cont Next of
Gap Dir Open Dir Pry Cis Open Only Day Cases
(a) Deutschemark
1,000 60 40 9 0 100 0 50 100.900 60 40 0 0 100 0 40 50.800 64 27 9 18 73 9 36 ul0.700 58 38 4 8 88 4 58 260.600 64 24 6 6 91 3 48 330.500 58 34 5 15 82 2 37 620.400 54 30 15 28 65 6 58 1020.300 55 23 16 34 6] 5 50 1730.200 45 20 28 58 37 4 48 2850.100 51 5 38 ai 10 6 45 4480.000 9 0 9 0 0 0 0 790,100 46 6 45 84 a 2 56 AT40.200 44 21 33 63 32 2 52 339—0.300 43 33 22 44 52 9 53 2080.400 45 4\ 8 21 77 I $l 103-0.500 55 32 6 5 80 3 42 650.600 43 45 13 I8 78 5 45 40—0.700 63 32 5 MW 84 5 58 19—0,800 70 20 10 10 80 10 50 100.900 25 75 0 0 100 0 50 4~1.000 47 53 0 6 88 6 53 17Closing Price Trading Range Cont No.Cont Below Rev Cross Adj fr Cont Next of
Gap Dir Open Dir Prv Cls Open Only Day Coses
(b) S&P 500
58 37 5 16 84 0 53 19
20 40 40 60 40 0 20 5.57 14 14 43 57 0 43 755 45. 0 18 82 0 36 in44 22 33 33 56 0 li 959 29 12 29 7I 0 59 1742 27 31 56 44 0 52 8557 18 21 58 36 6 57 150SI 10 36 78 16 5 47 3it5l- 4 43 90 5 3 45 4810 0 0 0 0 0 0 18544 3 Sl 92 4 2 55 62646 10 4l 76 18 3 I 30048 1§ ~ 3l 59 35 — 3 53 412245 23 317 55 34 9 55 7432 38 27 $i 43 5 62 3735 35 30 50 35 i5 45 2078 i Ul a 89 9 28 1813 38 50 63 25 13 50 875 25 0 25 7 9 50 446 = 21 25 42 42 17 50 24
 
 
* Values are shown as percentage of cases in each line category.
{continued)TABLE 15-6 (Continued)
 
 
 
 
 
 
 
_ Closing Price Trading Range Cont No.Cont Below Rev Cross Adj fr Cont Next ofGap Dir Open Dir Prv Cls Open Only Day Cases(} US. Treasury bonds1.250 54 46 9 8 85 8 38 131.125 9 100 0 9 100 oO 100 21.000 50 17 33 50 33 17 67 60.875 40 30 20 40 60 oO 30 100.750 29 24 47 7 24 6 47 170.625 53 29 (8 35 65 0 53 170.500 35 29 32 65 29 6 47 340.375 43 25 26 70 21 4 46 840.250 50 12 34 69 20 6 55 2350.125 52 2 38 86 4 6 53 7240.000 0 9 0 0 9 0 0 3210.125 47 2 43 85 5 4 47 6130.250 SI 8 37 75 14 8 49 245~0.375 49 17 33 55 33 8 49 830,500 36 33 28 61 36 9 53 360.625 « 39 35 26 43 52 4 30 230.750 30 50° 20 30 70 0 50 100.875 50 30 20 40 60 0 50 10—1.000 * 67 17 17 33 67 0 42 12~1.125 67 0 0 0 100 0 100 3—1,250 30 60 10 10 90 0 60 10Closing Price Trading Range Cont No.Cont Below Rev Cross Adj fr Cont Next ofGap Dir Open Dir Pry Cls Open Only Day Cases(d) Heating oil0.020 27 38 13 2 58 19 90 480.018 40 20 40 60 40 0 80 7 50.016 33 50 17 25 42 8 ‘so 120.014 25 13 63 63 38 0 38 80.012 54 27 10 20 66 12 56 4l0.010 26 47 21 32 58 fl 37 190.008 48 26 18 43 48 8 52 610.006 48 24 22 40 45 7 50 164_0.004 44 13 32 52 28 10 46 30!0.002 49 4 35 66 6 15 43 4070.000 0 0 0 9 9 0 9 2660,002 4l 3 40 78 4 4 55 4620.004 39 14 33 60 2