Opening indicators give you an idea of how the stock market will perform in the first few hours of the trading day. You may not be able to predict whether the market will end up or down, but you can see overall trends of volatility or stability. Stock market news coming out overnight affects investor confidence in the morning. The market can also be influenced by orders already placed and ready to be executed as soon as trading opens.
Global Market Activity
The U.S. stock market is connected to the other markets around the world. Time differences between countries let you see the activity in other markets before the domestic market opens for business in the morning. Massive drops in European stocks can lead to a bad day on the U.S. market. Likewise, positive activity in the world markets can indicate increased investor confidence that will carry over to the U.S. opening. Some industries have similar movement on all markets. For instance, oil and technology stocks tend to respond to the same factors around the world.
A typical stock's trading volume is highest at the market opening, then drops in the middle of the day and rebounds again near closing. A high volume of small trades is more volatile than a few large trades. This is typically the result of institutional investors purchasing large blocks of shares at once. Interest in a specific stock from large institutions may indicate that daily trends will be sustainable. Low volume may indicate a lot of short-term traders instead of institutions that will hold the stock for the long term.
Opening indicators are not a guaranteed predictor of market activity. Investments should be based on solid analytical data, not a rush of excitement from the sudden activity at the opening bell. Look for areas where the majority of investors are acting out of emotion and going against the financial analysis. You may be able to profit from these investors acting irrationally by taking the opposite action.
Certain upcoming events can reasonably be expected to affect stock prices. For example, announcements by the Federal Reserve regarding interest rates may drive prices in the financial sector. Enactment of new laws directed at major companies can also influence the stock market. Be careful when relying on information that is still speculative. An earnings call may turn out differently than the analysts had predicted, drastically changing the stock price.
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