PROJECTING DAILY HIGHS AND LOWS

Statisticians claim that tlie best forecast of tomorrows price is todays price; they state that no one has been able to retiably accoimt for all the factors that would be needed to accurately project the changes thai result in the high and low prices for tomorrow. Nevertheless, many traders project these values and seem to use them with success.

PivotTechnique

The simplest approach to projecting tomorrows highs and lows is to base those figures on the average price of today plus or minus a value that somehow relies on the current trading range, or volatility One technique, based on a pivot point 2 projects two levels of support and resistance-

Pivoi point Resistance 1 Suppon 1 Resistance 2 Support 2

= ( + - )/2 Rl=2xP-L Sl=2xP-H R2 = {P-S1}+RI S2=P-ifil-SI)

DeMarks Projected Ranges

Another author and trader, Tom DeMaik, has based his projections on the positioning of todays opening price relative to yesterdays closing price, which gives him added timely

Maik Etzkom, AD in a days work," Futures (Januarj 95). This technique is attributed to William Greenspan.

3 Tom DeMaik, The New Science of Technical Analjsis (John Wiley & Sons, New York, 1994).

information. If todajs open is higher than the pre™us close, the projections are biased upward; if lower than the close, they are biased downward.

1. If todays close is below todays open, then

Tomorrows projected high = (H + + 2 x l)f2 ~ L Tomorrow s projected low = (H + + 2 x I)/2 -

2. If today s close is above today s open then

Tomorrow s projected high = (2 x H +1 + C)/2 - L Tomorrows projected low = (2xH + L + C)/2 -

3. if todays clo!.e is the same as todays open, then

Tomorrows projected high = {H + L + 2x C)/2 - L Tomorrows projected low = (H +1 + 2 x C)/2 -

Once the basic formula is determined, biasing tomorrows projection in the direction of todays close relative to todajs open, then the projected high is foimd by remo\ing two units of the low price, and the projected low is foimd by remo\ing two units of the high price from the formula. This effectively shifts the projection in the direction of the new high by one-half the difference of todajs close and todajs low, (C -L)/2, and the new low by one-half the difference of todays close and todays higii, (H - C)/2.

Comparing the Two Ranges

Because the two methods, the pivot point technique and projected ranges, use the same basic prices, combining them with simple multiples, it is not clear whether the results give \alues that are the same or different. For example, if the Deutschemark had a higii, low, and close of6600, 6450 and 6500, the first pivot method would give a projected first resistance level (high) of 2 X (6600 + 6450 + 6500)/3 - 6450 = 6583, DeMarks projected high is different based on how todays opening price relates to the pre\ious close. If the open is lower than the pre\ious close, we get (6600 + 6500 + 2 x 6450)/2 - 6450 = 6550.1 if the open is higher, we have (2 x 6600 + 6450 + 6500)/2 - 6450 = 6625, and if the open is about Hie same as the pre™us close, then the projected high is (6600 + 6450 + 2 x 6500)/2 6450 = 6575. It seems reasonable that the pivot point method retums a value close to DeMaiks neutral case, when the market opens imchanged from the pre™us close.

TIME OF DAY

Market participants, especially floor traders, are the cause of periodic movement during the day Angas called these the "tides of the daily prices." Over the years, the great increase in participants has added liquidity to each pit but has not altered the intraday time pattems.

There are a number of reasons for the regular movement of prices. Because most of the dauy volume is the result of day trades, those positions entered in the moming will be closed out by the aftemoon to avoid the need for the margin required of positions held overnight. Orders that originate off the floor are the result of ovemight analjsis and are executed at the open. Scalpers and floor traders who hold trades for only a few

minutes frequently have a midmoming coffee break together; this natural phenomenon causes liquidity to decline and may result in a temporary price reversal. All traders develop habits of trading at particular times Some prefer the opening, others 10 minutes after the open. Large fimds and managed accoimts 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 normally used to assess the situation. A fioor 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, aU local setting is absorbed by the market and later attempts of the locals to liquidate will hold prices up. In any event, fioor trades

can be expected to take the opposite position to the opening direction, usually causing a reversal eady in the

Tubbs Stock Market Correspondence Lessons, Chapter 13, explains the dominant pattems in the stock madcet (given a 10:00 A.M.-to-3:00 P.m. session).

1. If a rally after the open has returned to the opening price by 1:00, the day is expected to close weaker.

2. ifthemarketis strong from 11:00 to 12:00, it will continue from 12:00 to 1:00.

3. If a reversal from 1:00 to 1:30 finds support at 1:30, it will close strong.

4. If the market has been buUish imtu 2:00, it will probably continue imtu the close and into the nexl day.

5. A rally that continues for 2 or 3 dajs as in (4) will most likely end on an 11: 00 reversal.

6. in general, a late afternoon reaction down after a strong day shows a pending reversal. Putting these together, the following pattems (among others) can be expected:

1. A strong open with a reversal at 11:00 not reachhig the opening price, then strength from 11:00 to 1:00, a short reversal imtu 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. continuum lower imtil 1:00. reverses again imtu 1:30. and then closes weak.

Merrills work shows the hourly pattem of the stock market in Table 15-1. The grid clearly indicates a bullish bias with 1963 the most obvious. The pattem is imiform and similar to what would be expected: early trending, an adjustment, then a wave of down-updown. Contrarj to commodities, these 4 years show exhremely consistent strength on the opening with a sell-off on the close. Commodity prices may have regular pattems, but these pattems will occur with downward moves as well as upward ones It is just as hkely to see an opening sell-off with a rally on the close.

For commodities, the pattems are similar but may be compacted, as in the case of agricultural products, due to shorter, earher hours (9:30 A.M. to 1:15 P.m. for most Chicago grains and hvestock), or shifted as with currencies that open eadier. Knowing the daily time pattems would not only help a day trader but would also aid any speculator to enter an order at a better place. Figure 15-2 shows the time pattem for the Chicago Mercantue Exchange hve cattle contract (open from 9.05 A.M. to 12:45 P.m.). Seventy-six consecutive trading dajs were tabulated forthe Jime 75 contract from February 1 through May 31, 1975, an active period