|Pre-market routine is an information gathering process. It is designed to understand the trading environment, not to create a bias or make decisions based on a single data point. Pre-market information gathering does not negate our technical analysis or trade plans such as support/resistance, pattern recognition, or trade setup/entry and exits.
Pre-market analysis is analogous to what you would instinctively do when planning to cross the street. To safely cross the street, you would consider the width of the street/highway, traffic volume and speed, traffic signals, marked pedestrian crosswalks and signs, time of day, weather conditions, etc. Taking all these factors into consideration and looking both ways before proceeding, you would decide if it was safe to cross. If you determined that it was unsafe at that moment, you would continue to monitor all the information until you determined that it is in fact safe to cross. We know that being oblivious to crossing a multi-lane highway at peak traffic without paying attention to traffic/pedestrian signals can be a deadly exercise. Similarly, being oblivious to the trading environment can have a negative effect on your trading account even with very favorable fundamental and technical analysis. Remember mom and dad’s timeless wisdom. “Always look both ways before you cross the street”
Below is a pre-market routine designed to gather information before engaging the market. While not exhaustive, use as a template to understand the market environment prior to engaging. Over time you will be able to quickly assess the market environment, and adjust your plans accordingly. To have the greatest impact, you must do the analysis consistently. Being inconsistent is like crossing the street frequently, but only occasionally looking both ways. Diligent pre-market analysis will help you engage the market in a more favorable trading environment, and allows you to know when to take your hands off the mouse and keyboard.
|Read News||www.marketwatch.com||Is news positive or negative?
How does it make you feel – optimistic v. pessimistic? “Good news” can be bad, and “bad news” can be good.
|Divide paper into two columns labeled “Positive News” and “Negative News.” Write news summary under appropriate column based on how you view news. What is the balance of news?|
|View economic news for today, and look forward 7 – 10 days.
Note relative importance of each report; scale A – F
Compare consensus to actual. Depending on relative importance and variance between consensus and actual, an economic report could have significant impact on pre-market futures and market open.
Some upcoming news events can have a multi-day impact on the market. Grade upcoming news items anticipating their impact as we approach the event. Example: Upcoming FOMC meetings are closely watched. Trade cautiously (position size, tighten stops, etc.) several days before/during the meeting, until the end of meeting announcements are made.
|Track economic reports and their impact on pre-market, and market action to get a feel for normal market reaction. Note other events that coincide with economic announcements that may have an overarching impact, i.e. political crisis, war, etc.|
|Pre-market indicator (PMI)||www.nasdaq.com
$QMI.X on TradeStation
|PMI has a 92% correlation to trader sentiment @ open. PMI is stock up-tick v. down-tick. More up-ticks = positive sentiment, thus buying. More down-ticks = negative sentiment, thus selling.||Is PMI positive, neutral, or negative? Track PMI daily to gain confidence in its correlation to the market open.|
|Indices Futures Correlation||ES – S&P Futures
YM – Dow 30 Futures
NQ – Nasdaq 100
TF – Russell 2000
|Think of the indices futures as a family:
S&P is the bell weather (Mom and Dad)
Dow is like a small child and follows Mom and Dad closely
NASDAQ is like an older sibling running back and forth
Russell is like a disruptive middle child and is more active during the spring and summer
NASDAQ and Russell sometimes compete for lead.
|Look closely for correlation between the futures
Are the overall patterns very similar?
Is movement above/below the 8 MA coordinated?
If not, markets are not in sync. Wait for harmony.
|Bonds – 30 year||www.online.wsj.com
|Stocks and Bonds are negatively correlated. Stocks up, bonds down.||When bonds are up and S&P futures are down, or vice versa, is an indicator of a good trading environment.
When both bonds and S&P futures are concurrently up or down, something is wrong. Do not engage market until one is up while the other is down.
|Inside Day||Daily S&P Chart||Compare previous day’s trading range to anticipated open today.||Mark your chart with horizontal lines at the peak and low of the previous day.
When today’s open is within previous day’s trading range, it is an inside day.
Inside days are generally choppy, and designed to take your money.
Wait until today’s price action breaks outside (above or below) of previous day’s trading range before engaging the market
|Dow 30 Stocks v. Dow Futures||
|Dow 30 ($INDU) is cash weighted index. Examine the number of stocks that are > or = $.94, and < or = $ – .94. Net the number of +/- stocks, and multiply the number by 20. Example. Assume the futures value (YM) is + 70. If the ($INDU) has four stocks $.94 or greater and two stocks $ – .94 or less, the net number is positive 2. Multiply 2 X 20 = 40. Compare the result (40) to the futures value. If the futures value (+70) exceeds the cash value (+40), the market is overbought by +30 points. Conversely, if the futures value is below the cash value, the market is oversold. If cash and futures are equal, market is at fair value. Cash is king; therefore cash attracts futures. Cash and futures will try to come together. Note: Allow a 10-point fluctuation between cash and futures, i.e. if cash and futures are within 10 points; consider the market at fair value.
|In the pre-market count the number of DOW 30 ($INDU) stocks that are plus $.94 or higher, or minus $.94 or lower.
Net the +/- $.94 counts, and multiply the result by 20 resulting in the pre-market change (overnight change) from the prior day’s close.
Determine DOW fair value by subtracting the absolute value (drop the sign) of the DOW 30 cash from the futures value. The result of this calculation is where the market should go immediately at the open.
Can also be viewed as an oscillator
Overbought = Futures greater than cash
Neutral = Futures and cash equal
Oversold = Futures less than cash
Overbought/sold = +/- 80
Extreme overbought/sold = +/- 140
Use as a real-time indicator throughout the trading session.
|DOW Pre-market volume||$INDU listing stocks with pre-market volume||Pre-market (overnight) volume can signal whether the open of today’s market will be “normal” or “volatile.” Daily measurements of pre-market volume will show what is typical or “normal” overnight volume. Unusually high or low overnight volume may signal an event in the overnight hours that will impact the market open.||Sum the Dow 30 pre-market volume and track daily via spreadsheet.
Take snapshots at 8:30a, 9:00a, 9:30a.
Average each snapshot over 60 to 90 days.
Note significant volume change between current day pre-market snapshots, i.e. 8:30a, 9:00a, and 9:30a. A significant late volume surge leading into the open today can signal an event. Investigate volume spike.
Note significant change between average pre-market volume over the past 60 to 90 days vs. today’s pre-market volume. Investigate volume spike.
|IBM and Goldman Sachs||Ticker IBM, GS||IBM and Goldman Sachs tend to lead the market.
Watch movement in pre-market
Use as indicator during market session.
When moving in sync, they signal the direction of the market. When not synchronized, watch until they move in tandem, then engage the market.
|Pre-market market bias
When in the pre-market both IBM and GS are $1.00 or more compared to the last trading sessions close, the market has a positive bias
When in the pre-market both IBM and GS are minus $1.00 or less compared to the last trading sessions close, the market has a negative bias
When in the pre-market both IBM and GS are less than plus or minus $1.00 compared to the last trading sessions close, the market will likely have a quiet open.
When one but not the other is +/- $1.00, be aware but this is a non-signal (IBM and GS are out of sync).
Open market direction
When IBM and GS are moving in tandem, market generally follows.
When they are out of sync, watch until they resynchronize.
|S&P Gaps||$SPX||S&P may gap up or down at the opening. The following is given only as a guideline. Take and track your own measurements
Gaps tend to fill as follows:
1 – 3 points, fill within 1st 30 minutes
3 – 7 points, fill within 1st 1.5 hours
7 – 12 points, fill in last ½ hour of trading day
13+ points = gap and run. Gap may take several days to fill
|Daily measurements of S&P gaps
Measure opening gaps (number of points)
Measure time required to fill the gap
Track in spreadsheet and find averages based on point move and time
|TRIN||$TRIN||Track TRIN at close of previous trading day
If TRIN closes + 2.00 or greater (oversold), Dow is likely to open plus 40 to 60 points
If TRIN closes + .60 or less (overbought), Dow is likely to open minus 40 to 60 points
|Track in spreadsheet over time
Measure TRIN level and opening point move at session open
Pre-market Data Gathering Worksheet
|POSITIVE NEWS||NEGATIVE NEWS|
|Economic Report Name||Day||Time||Relative Import||Consensus||Actual|
|PMI||Market Open (pos., neutral, neg.)|
|INDICIES FUTURES CORRELATION||ES||YM||NQ||TF|
|Coordinated above/below 8 MA|
|BONDS/STOCKS Negatively Correlated (Yes/No)|
|INSIDE DAY (Yes/No)|
|Pre-market DOW 30 ($INDU) vs. DOW FUTURES (YM)|
|a) Number DOW Stocks ($INDU) +$.94 or greater|
|b) Number DOW Stocks ($INDU) -$.94 or less|
|c) Subtract b from a|
|d) Multiply c times 20|
|If YM > d, market is overbought
If YM = d, market is neutral
If YM < d, market is oversold
Note: +/- 80 = Overbought/oversold
+/- 140 = Extreme overbought/oversold
|Subtract |d| (absolute value) from YM to get fair value. Market should open at this level|
|DOW Pre-Market Volume|
|Pre-market IBM and Goldman Sachs|
|> $1.00||Between $1.00 and – $1.00||< -$1.00|
|S&P ($SPX) Gaps|
|Prior Day Close|
|Gap at open||Gap Close – date/time|
|Pre-market TRIN ($TRIN)|