The Midday Quiet Offers Opportunity

Many traders focus all of their efforts on the first and last hours of the market day. These two segments often produce more than 60% of a session's total volume, and most of its price movement. The same folks walk away from their screens during the midday markets because they assume there's little or no opportunity.

This is a big mistake. The midday markets are a great time to play slow-lane strategies that take advantage of the crowd's impatience. Trade fills during this period also benefit from compressed spreads and more favorable reward-to-risk ratios. Moreover, it's easier to make profitable decisions after watching the bull-bear struggle that guides the first hour of trading.

First-hour ranges set up natural observation levels for midday traders. A late-morning breakout through the first-hour range signals a trending market. This thrust can trigger a series of moves in the direction of the break. Alternatively, when price remains stuck in its first-hour range into the lunch hour, it's unlikely the midday crowd will have the power to break its support or resistance.

Midday price action often tests the trends established in the first hour. As the day progresses, a significant reversal of first-hour sentiment becomes less likely. While this early trend remains dominant on most days, midday shocks still generate contrary price movement. These sudden events can shake weak hands out of very good positions.

Here's an example. An opening gap sends a market higher and attracts heavy volume. Price holds its own for a few hours after the opening, but then sells off with no warning during a midday shock. Midday traders can jump quickly into this falling market and take the stock at very advantageous prices.

Watch out for trouble during Wall Street's lunchtime period. As the big boys head out to fill their stomachs, the second squad plays a variety of games to generate volume and test supply and demand. Sharp whipsaws or short squeezes often characterize this midday testing period. The bottom line: Trust nothing you see or hear during the lunch hour.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [e-mail]. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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