Investors who don’t trade very often usually don’t pay much attention to the rhythms of the trading session.

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The Reversal Stage

After the clearing stage, the next 10 minutes or so (9:50 to 10 A.M. EST, 6:50 to 7 A.M. PST) is called the “reversal.” In this relatively brief period, whatever trend has been established over the first 20 minutes is reversed. Why does this occur? Because the market makers, who have been either predominately buying or selling from the open, now line up on the other end (that is, if they having been buying at the open, they begin selling) to make gains by taking the market in the other direction.

It is important for the casual online investor to remember that the market makers and specialists have no real interest to see the market go one way or the other. Their money comes from commissions, so all they want to do is make as many trades as possible, scalping whatever spread between the bid and the ask they can get away with, in addition to a small commission per trade. They are experts at knowing every possible way to take advantage of quick, short-lasting reversals in the trend and counter trend.

They are masters at getting the unknowing investor to pay the highest price to buy and take the lowest possible price to sell. They know how to move markets faster than you can possibly react. To verify this, simply watch a Level II quote screen on any fast-moving stock, like CMGI, Inktomi, JDS Uniphase, or any other of the so-called red-hots that have strong volume and volatile price changes.

For example, I recently observed JDS Uniphase being bid up eight points in the premarket. At the open the stock began rising, continuing up another three points. After about 15 minutes, it began a swift reversal that wiped away all of the 11 points it had been up.

What happens to the people who think it’s going to continue up and buy when it reaches its high of 11 points up? They get their head handed to them on a platter, that’s what. This is why common knowledge suggests that you not get caught in this early trading action. Traders know it, and investors need to know it, too.

Some traders believe the reversal stage is a good time to jump in and buy. But unless you are following the action very closely, you will find it tough timing your entrance just right.

While it is never transparent to the trader or investor how much influence the market makers actually have in pushing the market versus responding to computer buy and sell programs or large orders from money managers and institutional traders, it is wise to be very careful in volatile stocks by always using limit orders to buy and sell.

I will almost never use a market order at any time of the day, as I am unwilling to be tossed around in the stormy sea of quickly moving numbers. No stock ever seems worth chasing at any price¡ªeither I will control the price I pay or I will not play the game very simple. And if it doesn’t hit my price one time, I know there will always be another opportunity. This is where the discipline of being able to wait patiently for your price comes into play.

The only time I will even consider a market order is when it is clear from Level II that there is plenty of stock to buy or sell at the price I am wanting and that trading is proceeding relatively slowly. Then and only then I may safely enter a market order and not risk surprise.

For those who favor limit orders as I do, one recent related development for your consideration: As of early 2000 there is at least one company, R. J. Thompson, a new start-up online brokerage (rjt.com), offering both market and limit orders at the price of $5. Up to now, investors have always had to pay slightly more for limit orders. Now that this is changing, there is little reason not to protect yourself and use limit orders for almost all trades.

Intelligent Trading Stage

From about 10 to 11:30 A.M. or 12 noon EST (7 to 8:30 or 9 A.M. PST), the market settles down and a predominant trading trend until the afternoon session tends to be established. It is during this period that much of the trading by professionals takes place and where the market movement is best for active traders. Investors should use this period of the trading session to enter and exit positions with a greater degree of probability that market makers do not have as much advantage over them in the way of information.

Economic reports that are not announced before the market opens usually come out during this period, as well as company news that may move an individual stock or an entire sector. Stocks tend to settle into a range that sometimes points to their trend for the day, although in a volatile market when news may be announced, the morning session trend may be thrown upside down by what happens in the afternoon session.

Mid-Day (Lunch) Stage

This occurs at 12 noon EST and 9 A.M. PST and lasts until about 1:15 P.M. EST (10:15 A.M. PST) on a day of good to heavy volume. On a slow day, the closing action may not begin until 2 P.M. EST (11 A.M. PST). Usually, on a typical day, this is the least active stage of trading for the day, where stocks tend to settle into a narrow and uneventful trading range. Day traders tend to take a break at this stage, not wanting to “burn tickets” (rack up commissions) by trying to scalp when the action is relatively light.

Investors should use this time to analyze the early session trend and plot possible afternoon positions. This is a good time to step away from the computer, stretch, or do something else so that you are not too caught up in the trading action. Investors should know that this is not the best time to enter the market, as it is best to get a sense of the closing stage action before jumping in.

The significant event that occurs at noon (PST) is that the bond market closes for the day. This can create added activity in the stock market in the few minutes leading up to noon, as bond traders begin adding or subtracting liquidity to the market. Investors should be aware of this, and be careful during this few minute period.

The other significant activity that takes place during the mid-day period is that institutional traders are given a mid-day report by their research teams that influences the trading action beginning at 1 to 1:15 P.M. EST (10 to 10:15 A.M. PST). Certain stocks are touted by the analysts, and this leads to renewed trading in these stocks by the institutional traders that may result in sharp spikes up in these particular securities. Sometimes the action at this time is ignited by programmed trades, which are large block trades that kick in automatically and that have been placed earlier in the morning.

The Closing Stage

This stage begins at about 2:15 P.M. EST (11:15 A.M. PST) and lasts until market close at 4 P.M. EST (1 P.M. PST). The close is further divided into the period from 2:15 P.M. until about 3:30 to 3:40 P.M. EST and then the rather frantic action that takes place in the last 20 minutes or so before the market closes.

Active trading takes place during the first part of this stage, often but certainly not always following the trend established in the morning. On a more volatile, news-driven day, the trend reverses in the afternoon and there may be a steady sell-off after the market has been up through the morning and mid-day. Or, there may be a shift in trend in the other direction, as buyers come in and prop up what has up to then been a sagging market. Obviously, making generalizations about what may typically occur at any given stage is tough to do.

The last 20 minutes or so is like the opening 20 minutes, a volatile time, a dash to the finish line, wherein stocks may rise quickly and then fall just before the close due to individual and institutional traders jockeying for position as they close out the day. Many fast-moving stocks that have been up for the day will have a sell-off in the last 10 or 15 minutes or so, as day traders exit their positions to lock in gains and go home “flat.”

Market makers have the upper hand during this period, just as they do at the open, as they know what orders are on file to be executed at the close. They will attempt to bring the stock up if there is strong buying momentum and they expect the stock to open strong the next morning.

This is a period that the inexperienced investor should avoid like the plague. It is not the time for even more experienced investors to enter a position, no matter how anxious you are to buy the stock, unless you can time your buy literally five minutes or less before the close. Remember, with the growing awareness and availability of trading in the after-hours market, you will always have a chance to buy a stock if you believe you must have it due to an anticipated news release or for some other reason.

Because stocks can be easily manipulated during the last few minutes by market makers, it is best for online investors to know the trading patterns of a stock toward the close before participating at this time. I have sometimes found this a good time to enter low-ball offers to buy and see if they get taken, when a stock is selling off during this stage. But I do it only when there is reasonable probability that the price I get it at will set me up to already put me ahead by the next morning. In other words, I never buy at the close if I think the price is going to continue to fall in after-market or next morning trading.

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