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39

Table 10.7. Fair Value

Fmr VGhtt (FI

iSj-iFI

hlark£t Oixmiig

t5.00

tl.OO

4-4.00

4-2.00

4-6.00

-4.00

Down

-2.00

-4.00

42.00

-6.00

+7.00

-13.00

Down

-2.50

-2.50

0.00

Neutral

«.50

-3.50

48.00

Most ofthe time, the fair value is a smah number, and the S&P futures quote by itselfis an indication ofhow the market wih open. Do not make this assumption, however-always check the fair value delta (S) - (F). StiU the S&P futures close at 09:15 am. and stocks continue to trade during the fifteen minutes before the market opens, so - this figure can be misleading

Once we have made an assessment of the general market, we tum to the sutrject ofindi\iduaI stockpicking. Ifthe maiket bias is up, then we focus on our long selections. Ifthe market bias is down, then we focus on the shorts. With oiu- stock selections in place from last nights anal>-srs, we want to re\iew each of these stocks for any news before the opening beh.

Case lidy-: aena

Companies are re\ising their eamings guidance on an increasingly regular basis, with an attendant rise in the number of conference cahs being held before and after market hours. Depending on the severity of the news, the stock may or may not be halted. Companies with bad news are more hkel>- to be halted than companies with good news, so companies with good news create more opportunity for traders.

The problem with trading halts is that news does not go through the normal dissemination process, so when a stock reopens for trading, it wih gap and find its equihbriiun almost immediately, sinular to a speciahst del-ing the opening ofa stockimtil the imbalance can be resolved (unless the stock is halted, there maybe some liquidity on the ECNs for an NYSE stockj.

One company, Ciena (ClEN:Nasdaq), has held several morning conference calls, creating opportunity for the early bird trader. On November 12, 2001, Ciena held a conference call before the bell to update its guidance. The positive newsseitCienain from a price of 1 7 IE to well over 18 at the open, as shown in

Figure 10.15 Tradingwas never haltedin the stod:, so a trader listening to the conference cah could have gotten in immediately.

CEN-iomin NASDQ « /

19.S0

» «92-00

USD 17 oo

6000.00

((...,........i.t, ....I

(ihiti.lllll.....iiiliiiliill

3000 00

lOiSO 11:30 12:30 13 30 M30 1/12 1100 12.00 13:00 14,00 15-00

Figure 10.15. Ciena: November 12, 2001

Cienas conference cah that was held on Februar>-5*", 2002, was awaming. The stockwas halted for almost one hour. Note the opening counter-move fi-om the gap dcwn in Figure 10.16

tl NASDQ O2/OS/20DZ

IllHli

,i.Liiili..,...lii........il.ill

llllliliM.....................ilhl,

Ilpiir HI.I4>.t 1.11.1 l.-.m.in -.-IHI.



Another source of critical data before the bell are the govemmerits economic reports released at 08:30 am, such as the following:

a Non-Farm PajTolls

a Gross Domestic Product (GDP)

a Factorj Orders

a Consumer Price hidex (CPI)

a Producer Price hides (PPI)

On the dates ofthese key government reports, either aTiid trading before 08:30 am or wait imtn after the report is released. Further, do not trade offthese data except for a fade-the reaction to these numbers is usually impredictable and characterized by zigzs. The whole point ofprofessional trading is to eliminate as much imcertainty as possible, not to place ones capital on black or red

10a2 the open

The worst time for an investor to buy stock is at the open (once the investing pubUc catches on, this will change because conventional wisdom translates into lighter wallets). Conversely, the open is usually the best time for the trader to sell a long position and initiate a short position. In his Stock Traders Almanac, Hiisch plots the performance ofthe market by percentage each half-hour ofthe day [1. For the period between Januarj 1987 and December 2000, the market rose 52.8>o ofthe time on the open.

The market rarely sprints ftom the open because even in the case of escep-tionally good or bad news, the market needs time to digest the offsetting orders just after the opening beU Thus, the market wiU spend ftom fifteen minutes to one hour settlhig into a range before committing to a certain direction. At this point, either the long signals or short signals for the swing trades are going to start firing, giving an indication as lo the direction ofthe market. As the open develops, the trader builds up his or her portfoho of positions and lets price do the rest. When the market is spht, both long and short signals wiU trigger. This is the optimal scenario.

The cutofffor new signals is 11:00 am. Even 11:00 am is a httle late to take signals because the major trend decision ofthe market wiU almost always be made within the first hour ofthe trading day.

In its irtatmtiK of b.>l,lin(r !, the A«iu- IliiIc- mi1hi;uvs iiiif iliiy from tlic holiltiif:; )lti<»l tlit-ii ckUs ii lull); ><>iu<.ii ili<- 1,>11 (>, ,l.iv ttii ilit- i>i<-ii. SliUsiUIIv, (111-. il iimtiii- ir<iviil(-4 .1 ii.il 1 1)-,-

Oil.......1..-.,( 1.....1.....1. .."I..........h ...1 l..r4V.-......i m.,...l imill.im 1 ,- 1.1 is

111- ISM m,li\ ( 1 1 11......y) MiA Mi. Iiiili » himhii.-i v......ii ill S»iivii

10.4.3 lunch hour

For obvious reasons, the trader should focus on the open and close, wldle avoiding limch hour. Market makers like to eat day traders forlimch. StiU, companies have been known to sl in news annoimcements with traders on siesta, creating a scramble (referto the Tyco esample in Chapter 9).

By definition, the limch hour is a time for consohdation, so many rectangles and triangles set up during this period. Scan for stocks and sectors that fiended strongly in the morning and that are poised to continue in the afternoon (e.g., percentage gainers or losers). Use the rectangle to predict market direction for the afternoon.

During limch, the worst action a trader can take is to buy a stock that is up on the day in anticipation that it wiU resume its upward move in the afternoon (see the Rambus esample in Chapter 5). Wait for a confirmation before taking any long trades because the 01:30 and 02:00 pm half-hour periods are thewoist performing market inter\als [16].

10.4.4 the close

[n general, the intraday trend is persistent, i.e.. the morning trend wiU usually resume in the afternoon. Intraday V pattems are rare except for certain days of the week (Chapter 6). Beginning at 02:00 pm, ttie trader should be looking for reersal pattems to assess whether or not the morning trend wiU resume. If a rectangle forms, then the breakout ofthe rectangle wiU dictate whether or not the position should be cored or maintained.

To exit long positions or initiate new short positions, look for "M" tops. To exit short positions and enter long positions, look for "W" bottoms. Combine riiese pattems with BoUinger Bands to maximize trading profits near highs and lows ofthe day [1]. The drded areas in Figures 10.17 and 10.18 show examples ofM top and W bottom pattems, respectively.

The reversal pattem is a great tool because it serves two ftmcttons. Fust, it protects the trader ftom giving back the bulk of any profits attained during the day. Second, it ftees the traders capital for other strategies that trigger towards the end ofthe day. Furthermore, the rersal pattem is the only other decision point for determining whether or not to stay in a position untn the rest ofthe day (in addition to the profit target and stop loss).

Do not be anxious to cover short positions for rallies that occur earty in the close period. Rallies around 02:00 pm tend to fizzle, while rallies starting closer

" 11. l,.l.l,,., i..,,.,.......... I............,...1 . , .....,.

M" 11.]. 11.1 "W I...U.....(.1 .1. 1,4 1 .. ,... .1,. ,vi II111



Figure 10.17. M Tops with Bollinger Bands

>,20.1.5,.5,D) 39.89 40.89

IV"- ">-«-w .......

Ill) lt..ll,,4 , {.,

" I............

........ ! II

1 - .-, Mi.

. /. ,i..-.»,

ol itx I........!» .11 liu

II.N..I/. N..M..I.

.....1 1!.. .1

.....r" -

to 03:00 pm are more successful (47.90o\ersus 53.7° o). Exaerated mm-es occur in the last fifteen minutes ofttie trading d.

10A5 After tlie Bell

Welcome to the money pit. Trading stocks after the beh is the Tombstone of trading". It is agame of firepower, so traders with smah accounts are ad\Tsedto holster then mouse. As with any trading rule, however, there are exceptions. Here, we discuss two strategies where the odds are thted in the traders fevor. Both are news-driven strategies and should be used in exceptional cases.

Earmngs

Prewously, we discussed the impact ofmarket tone upon a companys eamings report and explained the News Continuation strategj. Most eamings reports are released shortly after 4:00 pm, with a conference cah beginning around 5:00 pm. The most important ad\ice we can give about eamings is to keep your finger on the trigger and an ear to the conference cah. Do not trade the stock blindly with a Level 11 window unless you know exactiy what is happening during the conference cal unless trading is your substitute for craps.

A trader with direct access usually canjump on a stock as soon as forward guidance is announced. By the time others have touched the keypad on their mobile phones, one can quickly estabhsh a smah position in a stock, albeit with some degree of shppage; however, as with any other trading position, there are no guarantees. This strategj is designed for the trader with direct access, quick fingers, andhotkejs.

News

Every major newspaper has an online evening edition that includes stories to be released in the print edition the fohowing day. Tj-picahy, these stories appear in the onhne edition after 6 pm, so a trader aware of an important storj about a pubhc company may be able to capitalize on this news afterthe beh.

The effect is especiahy dramatic when a smah-cap company is profiled in a technologj or science section ofnewspapeis such as the Wah Street Joumal, the New York Times and Investors Bnsmess Dahy. On October S, 2001, the evening edition ofthe New York Times profiled a smah bioteclmologj company named Cepheid (CPHD:Nasdaq) in the midst ofthe anthrax crisis. The stock had closed at 4.40, but quickly climbed above five in the evening as news ofthe Times story spread. The fohowing moming, the stock gapped up to 6.70, o-er 50° from tiie close (Figure 10.19).



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