It happened again. I had just exited a position, barely holding onto some profit before prices reversed and ran away without me. Not only that, but once again, I'd had to hunt down the broker doing lunch duty while my broker and others had gone out to lunch. These were the days when even some of us options traders still had traditional brokers we must call to place a trade. I'd been practically drumming my fingers on the desk while the broker had slowly and deliberately repeated my order and I confirmed that, yes, I wanted to sell to close my 20 contracts of whatever it was.
And it dawned on me. The last three times I'd been in a similar position had been during lunchtime here in Texas, too. In fact, they'd been very nearly at 12:45 pm Texas time, so 1:45 pm in New York. Because these trades had all occurred during my broker's lunch hour when I'd had to hunt down someone to place my trade, only three trades were needed before I noticed that pattern.
If it had been any time other than lunchtime, the pattern might not have been so quickly apparent. Now I often warn subscribers to watch out for a stop-running time of day that often begins as New York traders return from their own lunch period. In fact, as I type on June 3 at 1:34 pm ET, one has been playing out.
Annotated 15-Minute Chart of the OEX:
The OEX was on its way to an intraday low of 624.46 within a few minutes after this chart was snapped, so this was no stop-running move that was quickly reversed. Instead it was part of a downturn that was going to bring the OEX sharply lower.
So, although early on I dubbed this period a stop-running time of day and that title stuck with me and subscribers, I wish I'd never named it that. You see, I'm not one of those who believe that market makers, specialists, big money and all such people sit around figuring out how they're going to bilk mom and pop retail trader out of their money. I don't picture floor traders standing around, spitting tobacco out of the corners of their mouths, studying some screen. I don't imagine them discovering a stop on a 10-contract position somewhere, elbowing fellow floor traders and picking off that 10-contract position before reversing the markets again, barking out a laugh while they're doing it. No, instead, I picture floor traders, specialists, big money and others who might have something to do with the markets studying their inventories or their clients', figuring out how much risk they have on the table and deciding what they need to do in order to manage their risk.
What if big money wants to acquire stock but is afraid that the floor under the markets remains too unstable? Or conversely, if big money wants to acquire and is worried that any attempts to do so will send prices up sharply above the level at which they want to acquire?
I know what I'd do if I had enough money to move the markets. I'd be doing some testing. I'd stick my toe in the water with trades just big enough to move markets a bit in the thinner trading environment just as people are returning from lunch. Then I'd see what happens.
We retail traders better know what they're doing and realize that the test going on may not be the final move. We have to be aware that big money or someone else with the capacity to move markets a bit is doing some testing and it's the RESULT of the test that will better determine where markets go next.
So that I can include volume, I've used the SPY to show one such test underway right during that stop-running (or market-testing) time of day.
Annotated Five-Minute Chart of the SPY:
Annotated Five-Minute Chart of the SPY:
Although the 1:35-1:55 pm ET period isn't exact, it's easy to pick up on the test when you're trading and aware of what might happen. It's not always as easy to predict either the direction of the test or the outcome of the test. If it were easy to predict, big money wouldn't need the test at all.
Perhaps that's why on some days, no testing appears. We're moving into a summertime trading period, and the light-volume days of summer tend to produce either no test at all or else exaggerated responses to any test that does occur.
Being aware of such a test helps traders to fine-tune their trading plans. No one approach works for all trades. For example, some scalpers or day traders plan to be out of their first trades by mid-morning, waiting out the chop during lunchtime and that test that occurs as big money returns from lunch for a next entry. Some traders who are in position trades, have a big cushion of accumulated profits and don't want to get whipsawed out of positions will widen their stops as this period of day approaches. Traders who have just entered a swing trade they hope to hold onto a day or two but haven't yet accumulated any profits may elect a tight stop in case that a test results in a move against their positions.
Although there's not a single approach that works for all trades, all traders
should be aware of the propensity for some type of testing to occur during that
period of time and plan accordingly.