There’s no denying that this market is extremely volatile. It’s a difficult environment for swing traders and may be more suited to day traders. There is never a guarantee when the market closes that it will open higher or lower the next session, even if it’s a bullish or bearish close. We can, however, observe how the market closes to put the odds on our side, especially if we’re looking for a directional opportunity.

A Bullish Close

I like to enter a bullish trade closer to the end of the session if it looks like the underlying will close toward the high of the day or at least more than neutral (this is a little subjective). Naturally, I want the stock to close in positive territory. But if there is some resistance, or if the underlying is extended, odds tell us there is a better chance of the underlying pulling back before the close or next session. A strong bullish close at or above resistance shows that buyers have not moved away. This gives us better odds that the underlying will move higher, at least at the open. Many times, you will see the underlying continue to move higher, particularly if it is breaking resistance or triggering a bullish reversal. This also applies to the indexes.

A Bearish Close

For a bearish trade opportunity, look for a bearish close with the underlying closing near the low or at or below a support level. Just like a potential bullish close, you want the close to be more bearish than a neutral close. Like a bullish move, a bearish move has a better chance to move higher into the close. If it does remain bearish, I look for a bearish entry toward the close again. Many times, the underlying will continue to move lower especially if support has been broken or that bearish close has triggered a bearish reversal. Of course, this also applies to the indexes.

Stacking the Odds on Your Side

We all know option trading has a lot of risk/reward and probability scenarios. Whether a stock closes bullish or bearish, there is no guarantee it will continue in that fashion the next session or beyond. Market risk based on news can also create a gap that is the opposite of your expected move. But being patient and waiting to enter a position when there are more odds on your side can improve your results tremendously.

John Kmiecik, Market Taker Mentoring