Today we will discuss about pre-market activities and how to know how the market will open, the potential direction for the day and how to manage a position.
The stock market closes for trading at 4:00PM EST although trades can still be settled after it closes. There are orders which are designed to trigger when the market closes (Market on Close orders). There are also options (e.g., QQQ which may be traded up to 4:15PM (when the futures market closes for the US trading session).
The futures market then opens for trading at 4:30PM EST on the Globex (or Global Exchange). Depending on how that market is traded around the world during the US evening hours depends on how the futures will open for trading the next day.
A positive futures market (considering fair value) will mean a positive open and a negative futures market (again considering fair value) will mean a negative open for the market. We now have a glimpse of how the market will open for trading that day.
If I am already in a shorter style of trading for a few days, I can use this information to enable me to time my exit
Pre-Market Activity 31 May 2013
I took a snapshot of the premarket activity for 31 May 2013:
As you can see we were in for a very rough market open! The $INDU futures were negative by almost 200-points. It traded very negatively overnight and we now know that at some point during the next trading session that the cash index (which opens at 9:30AM EST) would be trading at that price.
What this means is that the market is getting ready to open for trading at a price that is lower than it opened. This is known as a gap (a space between the previous day’s closing price and the next day’s opening price).
To be continued…