Tuesday, January 09, 2007

10:30am Reversal Time

What makes 10:30 such a reliable reversal time?

Here's a revised excerpt from Elitetrader with my answer to the question.

I asked the same question to Dr. Steenbarger in his blog. He mentioned institutions finishing trading and locals entering trading.

My answer to the question is BREAK OUTS!

Instituitions are finishing up trading and the overseas markets are getting ready to close, so volume is declining. However if a significant S/R area is broken during this time period while institutions (volume) are in play, we have a higher chance of a trending day. If no breakout occurs during this time period, then we may see a range day.(No breakout= range day)

So when should we be aware of a possible breakout day? when economic #'s come out and during big news releases.
We can confirm the breakout if all indices are participating making new highs/lows.

If you look at volume during these key times you can see a pattern. But why is volume always highest the first hour and why do we see a decrease in volume around this period often followed by a reversal? When this pattern occurs I notice a higher probability of the market staying in a range for the day that reverses around high and low value areas based on the daily/weekly high volume S/R areas.

There is also another common occurence. If there is a HOD or LOD that is established during the 10:30am time period, the reversal tends to last for a 1 hour or a 2 hour period on the dot. Institutions exit trading, locals enter trading, and program trading kicks in. My guess is that many automated trading programs are set to close trades after a 1 or 2 hour period if no new low or high is made after the reversal period. If no new highs or lows are made then we normally revert back to the highest value area for the day. (taking into consideration that around 50% of the volume these days is made by trading programs this may be a logical hypothesis for this common occurence)

An example of this occurence from the last 2 days:
Tuesday Jan 7 2007: reversal is at 10:40am, next reversal is at 12:40pm- 2 hours later on the dot, (note: 11:41 we broke lower, so the programs stayed short until 12:40pm)

Monday Jan 8 2007: reversal 10:14am, next reversal is at 12:14 am. (note 11:15am we broke higher, so the buy programs stayed on until the 2 hour reversal)


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