After starting the season a perfect 11-0, my beloved Pittsburgh Steelers have had a rough few weeks.
Thanks to an outbreak of COVID-19 in the Baltimore Ravens camp, their game originally slated for the end of November was pushed back all the way to Wednesday, December 2nd.
Although they ultimately pulled out a win, they lost key outside linebacker Bud DuPree in the process to a torn ACL. And worse, the rescheduling meant just four days of rest between one of the most physical games played every NFL season and the Steelers’ next matchup with the Washington Football Team… a name that still makes me laugh every time I see it.
Unsurprisingly, the wheels came off as the game went on. Cornerback Joe Haden sustained a concussion just as opposing quarterback Alex Smith was heating up, and a late interception sealed Washington’s comeback.
Fatigued and down two key defensive players, Pittsburgh’s wide receiver corps dropped pass after pass and never got going against the Buffalo Bills in Week 14. And following an injury to offensive lineman Kevin Dotson, it was quarterback Ben Roethlisberger who performed terribly in last night’s embarrassing 27-17 loss to the woeful Cincinnati Bengals.
To top it all off, Hall of Famer and former Pittsburgh Steelers linebacker Kevin Greene passed away at the far-too-young age of 58… just not a good run for Steeler Nation.
So, while I had some hopes that my old college classmate Mike Tomlin might get another shot at a Super Bowl this year, the chances appear to be waning.
If you want my honest guess as to why this season worked out as it has for the Steelers, we actually have to look back a few more weeks.
The team was supposed to play the Tennessee Titans back in week 4, but that game was suspended due to a COVID-19 outbreak on the Titans’ squad.
Ultimately, that left the Steelers with an early bye week instead of a later one. In other words, not only did the team have to play three games in 11 days, they did so on top of three consecutive months of work.
But in order to win a Super Bowl, a team has to be well-rested and healthy at the right time.
And as it turns out, so do investors.
Just like Pittsburgh’s game schedule was altered by human behavior this year — which in turn altered their season-long training strategy — our trading approach must be similarly set up to react to human behavior.
Human beings are creatures of habit after all, and professional traders are no different.
In general, a professional will spend at most the first hour of trading — from 9:30-10:30 a.m. — adjusting their positions for the day. In nearly 15 years as a professional industry analyst, I have never had an in-person meeting with a banker during that time frame.
The next hour is usually spent on calls, in meetings or doing research. As a result, trading volumes peak at the open, then slide, then flatten out… today’s action in Apple Inc. (Nasdaq: AAPL) shows that rather clearly.
That means that the morning highs and lows generally happen in this time frame, and if you’re looking for an optimal entry/exit point, your attention should be focused here.
If you’re looking to buy, and the stock’s price trend is moving in your favor (up, in this example), it’s perfectly reasonable to get in at the open.
If instead it’s moving away from the direction you want it to go, you must exercise discipline and wait.
The trend will likely slow and reverse once traders leave their desks and head to meetings in the 10-10:30 a.m. time frame… just be patient.
Professionals will generally return to their desks around 11-11:30 a.m. EST, as that’s when Europe’s stock markets close. If there’s any genuine addressable action, you’ll see it in a volume spike and accompanying price move.
After that, traders begin to head to lunch, usually followed by more calls and meetings. And during that “lazy lunchtime” from 12-2 p.m., market volume declines dramatically, leaving only algorithms to move prices around.
These algorithms generally buy equities on a Volume-Weighted Average Price (VWAP) basis. This trend, also exhibited by Apple stock today, is evident by prices that are moving at a 45-degree angle.
In this case, without any people at their desks to sell, the market is only left with buyers, so the stock goes up. If the underlying trend were working in the other direction, the trend would be flat to down.
The next period to pay attention to is the close, from 3:30 to 4 p.m.
In general, this is the highest-volume action on the day, with both “algos” and professional traders actively settling their day’s activity.
Most days, this time period tends to trend up, as Apple did in the chart above.
When the trend is going in your favor, that makes the close a good time to sell. And the reverse is also true – when the trend is going against you, the close is a good time to buy.
So, in total, there are four situations we encounter.
When we’re buying and the trend is in our favor, I find it best to get in at the open, or if that’s not possible, sometime around the Europe close.
When we’re buying, and the trend is against us, we have to wait. Lows are typically made between 10-10:30 a.m., around 12 p.m., or between 1 to 2 p.m., and that’s where we want to get money in.
The opposites are true when selling. When the trend is with us at the open, we have to wait, as highs will generally be put in around 10-10:30 a.m., around 1 p.m., or at the close.
But when we’re selling and the trend is against us, we want to do so at the open, sometime around the Europe close, or toward the end of lunch.
On that note, if you were following directions when we got into Direxion Daily Small Cap Bull 3X Shares (NYSEArca: TNA), your 3% trailing stop would have hit on Friday at close when the market turned around at a slight profit. If not, selling now is fine as it’s back up near all-time highs.
Similarly, the ¼ stake in iPath Series B S&P 500 VIX Short-Term Futures ETN (BATS: VXX) posted a solid gain too, so selling to take profits here seems reasonable.
As traders head home for the holidays, only algorithms will be left, and volumes will be slim. As such, I expect markets will grind up slowly until the New Year.
And until then, just like those NFL teams, our portfolios need to be healthy and well-rested… so we can get hot at the right time.
All the best,