This column was originally published on RealMoney on June 23 at 10:58 a.m. EDT.

The last hour of the market day generates unique characteristics that can enhance or destroy profits. Stocks undergo a rapid change in character as the final hour approaches, and smart traders respond by adjusting their tactics in response to the shifting tape.

Historically, the Treasury markets closed at 3 p.m., alleviating their considerable influence on stocks and futures. This has changed in recent years with the advent of electronic markets, but a major shift still occurs at the start of the last hour.

This impulse responds to the evolution of intraday themes. Shakeouts are common and will frustrate traders expecting the daily trend to continue into the close. Fund activity also peaks in the last 20 minutes when block shares start hitting the tape. This enhances volatility and fosters an emotional brew that leads into the closing bell.

Traders have two urgent tasks during the final hour. First, they must clean up open positions and decide what they want to carry overnight. Second, they should look for new setups that will benefit with a late entry.

The last hour discounts that day's events and emotions. Price action during this time can take traders to the edge of sanity. This is especially true when conflicting forces need resolution, or a strong trend persists from earlier in the session.

Participants need to use their time wisely. Short-term trends that develop in the first 20 minutes of the last hour tend to fade sharply after 3:30 p.m. In fact, price action loses predictability into 4 p.m. because various closing strategies take control of the tape.

Tick Check

Watch the 15-minute period leading into 3 p.m. Look for evidence that may predict the direction of a last-hour surge. Gauge supply and demand through review of the

NYSE

Tick chart. Then pull up a liquid stock near its daily high and watch attempts to break out of midday ranges. This will show the quality of "stretch" in the price action.

Stretch refers to a stock's ability to move above the highs or below the lows of the day. The broad market shows little stretch most of the time. Watch for those special times when bidding wars erupt because traders are motivated to get in or out of positions at any price. These expose periods of great profit opportunity.

Limp final-hour action denotes a market that lacks direction. But these quiet periods can offer valuable entry signals. This is especially true when pure gravity triggers downticks into the closing bell.

Bunge Jumping

Bunge

(BG) - Get Report

offers a perfect example. It rallied early but a dead tape allowed gravity to take control in the last hour. New buyers showed up on schedule the next morning and rallied the stock back to its highs.

Loosen stops when you're committed to holding positions through the final hour. Support and resistance levels get tested during this period, and allowances should be made for small violations caused by stop gunning. Get out of the way after placing these stops and micromanage them.

What about the risk of holding stocks that sell into the close? First, make sure the downtick drops price into support, and not through it. Second, realize that daytraders grossly exaggerate the risk of holding overnight. You'll find the substantial rewards outweigh the measured risk of taking home positions.

Traders that buy weakness and sell rallies during the day must shift gears in the final hour and become trend-followers. Odds favor continuation of the intraday trend during this time and into the next day's open. So shorting stocks at new highs or catching falling knives in late breakdowns represent bad ideas in the final hour.

Major trends rarely reverse into the close, but contrary movement can escalate rapidly when they do. Late reversals trap the crowd that controlled the tape up to that time. These folks want to get out at any price when the market moves against them. Don't wait for confirmation when warning signs point to late reversals.

The final minutes close the books for many traders, institutions and market movers. This can set up very strange price behavior. The bid-ask spread can go crazy, as insiders penalize one or both sides of the market. All market numbers can shift rapidly near the close to deal with final orders, traders going flat and covering short-sellers.

Insiders paint the tape at the close to influence the next day's open. Overnight strategies must trust the trend because whipsaws can drag the closing print into irrational prices. Predictably, the thinnest issues get the biggest paint jobs in order to fool technical indicators that rely on closing data.

The finality of the close intensifies greed and fear. Traders make very foolish decisions at this time, because their frustrations will creep into rational strategies. The intensity of these emotions can generate supply-demand imbalances that make the last minutes of the trading day dangerous and unpredictable.

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. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;

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