Through years of observation, senior trader Larry Pesavento has noticed that the first trade of the day is usually support or resistance throughout the trading session. He explained a powerful tape reading technique in his book “Opening Price Principles: Best Secrets on Wall Street” published in 2000. There are many applications of the opening price principle, whether you are playing stocks or futures.
Which market works best?
Pesavento focuses his research on S&P 500 index futures, but most liquid markets benefit from analysis, especially when the intraday range is set in place. For currencies, this is a more difficult process because the cycle of foreign exchange cross-trading is 24 hours, and there is no universally agreed opening or closing price. Even so, this week’s first foreign exchange print-Sunday night in the United States and Monday elsewhere-can be effectively used for the same purpose.
This principle is valid in many ways, but it shows its maximum value when the price returns from above or below after establishing an early trading range to test the opening price. This progress may take 30 minutes to two hours, depending on volatility. Once in place, draw three lines on the 5-minute or 15-minute chart, located at the high, low, and opening prices. The relative positioning between these levels will generate a variety of useful information and trading signals.
The simplest application is when prices retrace these levels during intraday trading hours. Pay close attention to small-scale breakthroughs, crashes, reversals, and failures, and use these fluctuations as short-term entry and exit signals. This is easier than it sounds, because you are looking for the same type of action that you would expect at a larger scale of support or resistance, that is, the price expands when the level breaks or pushes in the opposite direction when the level remains. The high and low ranges then act as transaction filters, depending on their position relative to the opening price.
Let’s see how this works in two common intraday scenarios.
Invesco Nasdaq 100 Trust (QQQ) gapped to US$102.54 on January 13, and rebounded to US$103.62 at around 10:50 in the morning. This action established the early trading range, and the swing low was the same as the opening price. Then it starts to descend slowly, triggering the test during the opening print at lunch time. The fund rebounded for 30 minutes and rolled, retesting the pivot at around 1:20 pm. The solid downward thrust confirmed the collapse that led to the sharp intraday drop.
The failed rally at lunchtime completes a bearish cup and handle pattern, which increases the reliability of short positions when the price breaks through the opening price and range lows. It is important to note that failures that generate considerable intraday volatility can usually be traded for a few days, as they continue to act as resistance. A similar dynamic applies to opening price breakouts.
Gilead Sciences (GILD) share price gapped and fell on December 9th, opening price of 103.50 US dollars, early trading range between 102.28 US dollars to 104.47 US dollars. Please note how the opening chart is located between the first swing high and low of the session, setting up a tape dynamic different from the QQQ example. In this case, the impact of violating the first printed matter should be less, because the mobile barrier is waiting, getting higher and higher.
The first 5-minute bar chart establishes the morning range, but it is not obvious until the successful test within approximately 45 minutes of the trading day (red circle). In turn, the next rise will test the opening price and produce a breakout that will increase by more than 60 cents in the next 10 minutes. The price quickly stagnated at the top of the range, completed the bullish cup handle pattern, and broke through the gap with a strong directional thrust and continued to enter the closing clock.
These three data points bring order into the typical morning chaos, allowing you to launch your first strategy while most people are trying to assess the tone of the market. This extra insight produces a clear trading advantage, which can increase predictive power in a short period of time, allowing you to gain a firm foothold on the road to profitability.
The first transaction of the day in the liquid market defines a narrow price level that can be used as support or resistance for the entire trading session. When used in conjunction with intraday trading ranges, this opening price principle has many applications.