One of the best posts I have ever read. Education via Hacktheripper. I would highly suggest following him on twitter at @hacktheripper1.
Great Post from my buddy Iconoclassic
This is something I found and copied some time back. I am posting just the portion that talks about the so-called reversal times. Worth reading in my view. It is not etched in stone, but is simply one more addition to your arsenal.
I believe it came as a series of emails from pristine.com....
There are very specific times each day (more like brief periods of time actually) around which stocks, sectors and the general market as a whole consistently experience pronounced price reversals. These Reversal Times, as I like to call them, are generally so uncannily accurate that many of our trading students and subscribers use them as the primary bases for every single one of their micro-trades. In fact, the potency and accuracy of these time frames have compelled us to rely on these specific periods of time (there are eight in total) so completely that we encourage most of our traders in training to only take micro trades if and when the signals to act on them occur at or near one of the eight reversal times. It should be noted that these Reversal Times are intra-day in nature. They serve as an incredibly valuable tool for micro-traders who constantly look to exploit small but tradable price moves within a single trading day. It should also be noted that these time periods do not, or have not as yet, changed. So far, they have stayed the same day in and day out. I truly that what I’m about to reveal to you will help take your intra-day trading skills to higher heights of mastery. Let me now carefully define each one of the reversal time frames, and review their idiosyncrasies and tendencies. For each reversal time is unique and possesses its own individual character.
The Eight Reversal Times Defined and Explained
As mentioned above there are eight specific times around which stocks and the market in general tend to consistently turn or reverse. These Key Reversal Times are as follows: a) 9:50 – 10:10; b) 10:25 – 10:35; c) 11:15 – 11:30; d) 12:00 – 12:15; e) 1:15 – 1:30; f) 2:15 – 2:30; g) 3:00; h) 3:30. All times are stated using Eastern Standard Time. Let’s now delve a little deeper into each one.
1. 9:50 – 10:10 EST. This is the first of the eight reversal times, and it just so happens to be one of the most significant. Frequently, a stock that is moving up sharply into this reversal time zone will either stall or completely reversal and head lower. The same is true for the opposite direction. A stock that is moving down into this reversal time zone will tend to stall or completely turn and head higher. It should be noted that these turns are not always complete reversals, but more often than not, the micro turns that do evolve will offer the astute intra-day trader a decent profit making opportunity, especially if the move preceding the turn was very robust. There is a very good reason why the 9:50 to 10:10 period is one of the more potent reversal times and why it often produces the most abrupt turns in stocks and the general market. It’s because the activity in the first 20 to 30-minutes of trading is often driven by an accumulation of pre-market and overnight orders that have been placed on the books of specialists and market makers or all kinds. An individual stock’s character, or a specific sector’s strength or weakness, or even the broad market’s overall bias is often temporarily affected by the sudden execution of these pre-market orders. In other words, the first 20 to 30-minutes of trading are often “painted,” inadvertently and advertently, by the natural backlog and sudden execution of all the pre-market orders, which are created by the market’s 17.5-hour close. This gives the market and individual stocks a 20 to 30-minute bias (up or down) that often fades, stalls or completely reverses after the backlog of orders has been satisfied. Needless to say, this tendency sets up a tradable opportunity for those who are aware of it. Astute micro traders trained by our firm use several micro time frames (largely 5- and 15-minute charts) to look for stocks that are showing the noticeable signs of change between 9:50 and 10:10. We will cover the signs you need to know how to identify shortly.
2. 10:25 – 10:35 EST. This is the second reversal time and it also represents one of the more potent ones. By the time this period comes along, the market will have already revealed its true bias for the morning, making sound trading signals more reliable. A stock that is moving down into this reversal time zone will also tend to either stall or reverse back to the upside. If a stock is moving up into this time zone, it will often halt its advance or reverse and head lower. Once again, our trained micro traders predominantly use 5- and 15-minutes charts to look for stocks that are showing the signs of change between 10:25 and 10:35 EST.
3. 11:15 – 11:30 EST. This reversal time tends to accomplish two very important things. Firstly, it tends to halt the prevailing trend preceding it, just like all the other reversal periods. For instance, if the E-mini S&P 500 futures contract is rallying strongly into the 11:15 to 11:30 time zone, chances are its advance will either be abruptly halted or a partial to complete reversal of that advance will ensue. We have further found that the stall or reversal that this time zone puts in tends to be enduring in nature. In other words, tops or bottoms made between 11:15 and 11:30 have a tendency to remain in place for several hours. The second thing this reversal time accomplishes is the kick off of the period we commonly refer to as the mid-day doldrums. The mid-day doldrums is an elongated period that spans from 11:15 to 2:15. It represents the most troublesome period for micro-traders because during this extended time zone, many stocks, as well as the market as a whole, often go into a major lull. Follow-through during the doldrums is usually sparse at best and absent at worst, resulting in a higher than normal failure rate in all micro-trades. If there is one period during which we wish we could force traders to take a departure from the markets, it is the mid-day doldrums period. All our traders are encouraged to take a break or at least to trade very lightly during this time. We’ve seen too many traders allow this “black hold” in the market to reclaim their hard won profits from the first part of the day. “Stay away if you can. Trade lightly if you must.” That is our general rule of thumb.
4. 12:00- 12:15 EST. We have found this more minor reversal period to be most important on days in which the majority of the morning has been quiet and/or directionless. Despite the fact that it is in the mid-day doldrums period, we have seen the 12:00 – 12:15 time zone ignite some significant moves in both directions, but only when the preceding period was very quiet. Keep in mind that these 12:00 – 12:15 reversals are far less common than the preceding three reversal periods above.
5. 1:15 – 1:30 EST. This is also one of the more minor reversal periods, but its consistency is very high. We have found the 1:15 to 1:30 reversals in stocks (when they do occur) to be most significant when they coincide with the retest of a prior high or low. For example, lets say XYZ tops out around 11:15. After a pullback, it rallies back to retest the 11:15 between the 1:15 to 1:30 time period. The odds of a sharp pullback are dramatically increased, because the retest of the prior high is coinciding with the 1:15 - 1:30 time period. The retests of prior tops and bottoms that occur in line with the 1:15 to 1:30 Reversal Time can present some very potent trading opportunities.
6. 2:15 – 2:30 EST. Based on what we have discussed previously, this time period puts an end to the mid-day doldrums period. It also serves as a very reliable reversal period for stocks and the general market as a whole. The most important thing to remember about the 2:15 to 2:30 time is that it often marks the precise period when things start heating up again. In other words, the sectors in the market that were exceptionally hot or weak before the mid-day doldrums will often resume their original up or down trends shortly after the 2:15 to 2:30 reversal period. In fact, the tendency for stocks to reverse between 2:15 – 2:30 is so pronounced at times that many of our trained traders regard the period as the market’s second open. Is this always the case? No. But it happens enough to make a special note of it.
7. 3:00 EST. This minor reversal time often brings change because it coincides with the close of the bond market. Bonds often have a pronounced effect on the equity market. When they have served as a nemesis for the market all day, their close at 3:00 will often represent a relief to equity traders, and the market will experience a bullish reaction. If, however, bonds have severed as the underlying support for stocks, meaning the main reason for the bullishness of equities, the closing of the bond market will be construed as the stock market having lost its number one ally. This perception will often result in a more negative reaction. To summarize, once U.S. bonds are out of they way, they can no longer help or harm the market. This often results in stocks or the market taking on a slightly different character. Please note that we have found the 3:00 reversal time to be most valuable is a guide for S&P futures and the corresponding e-mini contracts.
8. 3:30 EST. We have found that this time often reverses any move that happened to be ignited by the prior 3:00 reversal time. For instance, if the market started dropping from 3:00 and continued to do so right into the 3:30 reversal time, the odds would increase that the next short-term move would be up. The same situation occurs in reverse. Keep in mind that the last half hour is one of the most active for many day traders, as it often represents the last substantial flurry of activity.
9. 4:00-4:15 EST. While we did state that there were eight reversal times to be aware of, we do not want you to forget the fact that we are fast approaching a 24-hour trading environment. As post market activity proliferates and exchanges all over the world continue to merge and unite via electronic systems, this period will gradually become more significant, resulting in the ninth reversal time. Even though we are not quite there now, our traders are beginning to take advantage of this developing reversal time via the e-mini futures contracts. If your trading system has the ability to track these contracts after the official close, we encourage that you monitor this time frame carefully. We are betting that its future importance will be significant.