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Common Open Patterns

 

  

This is a list of common patterns of action that I see occuring very often early in the trading day, usually within the first hour.  While my main focus is usually the NASDAQ-100 Index Tracking Stock (QQQQ), these patterns can be applied to any stock with higher volume, that participates closely with the market, like MSFT, INTC, BRCM, AAPL, YHOO, EBAY, etc.

I look at these patterns as game plans for any given pre-market situation. Obviously we can't rely on patterns to repeat. We have to play what we see actually happening.  But when I see the same action repeating again and again over many years, it increases the predictability of it occuring again. I can then look for confirmation in my indicators. If I am prepared, my timing will be much better, and I will feel more confident about the trade.

If you have any questions, don't hesitate to ask.  Shawn Klug 

 

1.  Drop-Pop-Drop

2.  Pop and Drop (or Dip, Pop and Drop)

3.  Pop and Pop (or Dip, Pop and Pop)

4.  Drop-Pop-Pop

      Note: What's the difference between a Dip and a Drop? Well, for QQQQ I consider anything from

              10-15 cents to be a Dip. Any more, and its a drop. For other, wider-ranging stocks, that will

               obviously differ. You need to track them and get a feel for their average movements before

               you trade them.

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These first two patterns often occur in downtrending or topping markets.

1.  Drop-Pop-Drop


This pattern will occur more often in weak, downtrending markets where the gap is either neutral or positive. If the
gap were excessively negative, I would probably be looking for Pattern 2 instead.

The reason is, when we see large gaps down, and the market drops from open, the first pullback is usually pretty shallow. The large gap, plus any early selling, creates a lot of incentive for early bargain hunters and short covers, so the first pullback in that case will usually be more of a short-lived dip than a real drop.

First support levels...

The first move is an initial drop from open, so our first job is to look for first support.

Where?..... If the market is gapping up a fair amount, that first drop will often find support near the previous day’s

closing price. The previous day’s low will also often act as a first support barrier. If the market is gapping down below the previous day’s low, then we will look for support at pivots. Also be sure to look for support barriers in the daily chart. If there are no obvious support barriers, we will want to look at the average amount of recent first drops to give us an idea. The larger the first pullback, the weaker the market.

The first bottom is usually good for a long opportunity if the market has dropped a decent amount, but any long trades in a downtrending market need to be considered scalps against the tide, with unknown potential and conservative targets.

First resistance levels …


After the first bottom has been identified, we want to focus on exit targets for long positions, and a short entry, so our
next job is to look for a first top.

The first climb will often retest and fail, at or below the open price. We will also again want to watch pivots as resistance barriers. The lower that first resistance, the weaker the market. This first top often coincides with economic reports coming out around 9:45 – 10:15am, so be sure to watch for that. This first top should be followed by a break below the early low, to confirm a downtrending from there.

Short opportunities occur at the first top, if clearly identifiable, or the breakdown below the early low.

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2.  Pop and Drop (or Dip, Pop and Drop)

This pattern will occur more often in weak, downtrending markets where the gap is either slightly positive, neutral or negative. The more negative the gap, the more likely we are to see an early pop.

If the gap were excessively positive, in a downtrending market, we could have one of two situations:

A. We may have “gap trap” situation, in which case I would probably be looking for Pattern 1 to unfold, or be looking for a very small pop from open, where I would want to enter a short position. When we see large positive gaps, and the market climbs from open, the first climb is usually pretty small. The large gap, plus any early buying, creates a lot of incentive for early profit taking and shorts, so the first climb in that case will usually be more of a short-lived pop.

B. We may also however, have a potential market bottoming. So if the positive gaps are very large, in a downtrending market, and I only see a small dip at open, that puts me on guard for a change in the market, and Pattern 3.

First resistance levels…

The first move is a climb directly from the open price, or a very minimal initial pullback (dip), followed by an early climb above the open price. If the first move is a “dip”, that small drop can be a long opportunity. If the gap is positive, that initial pullback often finds support at or just above the previous day’s closing price, and continues from there up above the open price. That can happen very quickly though, making it difficult to catch for a long position, so generally our first job is to look for resistance.

  

Where?.... If the gap is down a fair amount, the first top often occurs at or near the previous day’s closing price. If the gap is below the previous day’s low, that low will often act as resistance on the first climb. If the market is gapping positively, the top often occurs near or below the previous day’s high, but remember, any higher high at that point changes the trend, and that will change our orientation for the day. Other than that, pivot or resistance lines also act as first top barriers. Also remember to watch out around 9:45 – 10:15 ET, when economic reports come out, because many times we will see direction changes around that time.

First support levels...

The first topping should be followed by a breakdown below the early low/open price, and downtrending from there, if the downtrend is indeed continuing. Any support at that point at the open price though, should be seen with caution, because the trend might be changing. Remember, early buying is a sign of strength, and could be evidence of a change in the trend. We need the breakdown below the early low/open price, to confirm the trend.

Short opportunities occur at the first top, if clearly identifiable, or the breakdown below the early low/open price.

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This next pattern is one that often occurs in uptrending or bottoming markets.

3.  Pop and Pop (or Dip, Pop and Pop)


First resistance levels…


The first move is a climb directly from the open price, or a very minimal initial pullback (dip) followed by an early
climb above the open price.

If the first move is a “dip”, that small drop can be a long opportunity. If the gap is positive, that initial pullback often finds support at or just above the previous day’s closing price, and continues from there up above the open price. That can happen very quickly though, making it difficult to catch for a long position, so generally our first job is to look for resistance.

Where?..... If the gap is positive, but below the previous day’s high, the first top often occurs near the previous day’s high. A breakout to higher highs, above the previous day’s high, is a sign of strength, and confirms that an uptrending is underway. In that instance, watch pivots for first resistance or the average size of the recent first climbs.

If the market is gapping down, the first top often occurs at or near the previous day’s closing price. Pivot and resistance lines also act as first top barriers. The first topping also corresponds quite often with economic data reports around 9:45 – 10:15am ET, so watch out for that.

The first top may be a short opportunity, because at that point we do not yet know whether we have a “Pop and Pop” or a “Pop and Drop” pattern. If the first climb resulted in a breakout to higher highs however, above the previous day’s high, that would confirm an uptrending. In that case any shorts would be considered scalps against the tide, with unknown potential and conservative targets.

First support levels...

  

From off that first top, the pullback should remain shallow if the up trend is continuing, and often bottoms at a higher low, above the early low/open price.

If the pullback bottoms at a higher low, or holds the early low/open price as support, that bottom is a long opportunity. The next climb should then hits higher highs, establishing an uptrending. We need that higher high to confirm an uptrending, otherwise we could have a double top, which would be another short opportunity.

If the bottom is not readable, the next long opportunity would be a breakout to higher highs, as long as the average intra-day range has not yet been met, and adequate potential can be estimated.

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4. Drop-Pop-Pop

Why is there no Drop-Pop-Pop pattern? Well, because I never really see that happen very often.

The first pullback is usually very reflective of the general market mood for the day. If the market is uptrending or bottoming, it is rare that it will really drop sharply from open, then make a 180-degree turn and continue the uptrend. If it drops sharply from open, it almost always downtrends from there. In those cases where the market is in the process of bottoming, we will more often see early downtrending, hit bottom mid-morning, and then buyers will show up in the afternoon. So I don’t really consider it an “early pattern”.

 

 

 

 

 

 

 

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