The hour before the market opens is one of the busiest stretches of a trader’s day, even though not a single domestic share has yet changed hands. Screens fill with overnight headlines, currency quotes, commodity prices, and a handful of indicators that attempt to forecast the opening tone. Among these, GIFT Nifty Live has become a fixture on almost every trading desk in the country. Meanwhile, a large number of first-time investors simply want to know whether the Nifty Share Price will start the day in the green or the red, without getting lost in jargon. Learning to read these early cues with care can turn a confusing pre-market scramble into a calm, structured routine.
Starting With the Gap
The simplest early reading involves comparing the offshore-traded price of futures with the previous closing level of the domestic index. If the former is comfortably above the latter, the market is expected to open higher and is said to have ‘gapped up’. The same logic applies to a gap down. The size of the gap indicates the magnitude of the opening surge.
However, a futures price compared to the index price can be misleading because normally futures trade at a small premium to cash, because of the cost to carry a position till expiry. So a seasoned trader would adjust for this premium while calculating the effective gap. For example, a futures price fifty points above the previous close may not represent much of a gap if fifty points is the normal premium at that point of time. Understanding how to adjust for the premium avoids getting spooked by an inflated figure.
Layering in Other Overnight Information
The futures price does not exist in isolation. So a wise analyst would combine his early reading with other information. Movements in global markets during the overnight session often provide the context for the movement of the indicator. Crude oil prices are particularly important for India as it is a net importer of energy. Currency movements, particularly the rupee, also provide useful information.
Domestic developments also need to be layered in. Announcements by companies, regulatory decisions, monthly sales figures by automobile makers, government data, etc., all come into play. A company which has announced stellar results the previous evening is likely to see its shares open higher irrespective of the indicator.
Sector-Specific Clues
Looking beyond the headline figure, an analyst can look for sectors which are likely to be most impacted by the developments overnight. A spike in crude oil prices will affect airlines, paints and tyre manufacturers. A depreciation in the rupee will affect IT exporters. A surge in global technology space will impact domestic software majors. Combining the general early reading with specific sectoral clues provides a far more rounded view.
The Pre-Open Auction Session
After the domestic exchanges have commenced, but before the actual opening of the trading session there is a pre-open auction session wherein orders are collected. An indicative opening price is calculated on the basis of the orders. This provides more reliable information about the likely opening than any of the overnight indicators. Traders who watch this session often find that the actual opening price differs from what they had expected in the early hours of the day.
Common Mistakes to Avoid
One common mistake is to take the early reading as gospel truth. The direction of the first hour’s trade is quite different from the direction of the entire day’s trade. Markets often ‘open’ strongly to reverse during the course of the day. The first hour’s direction should not dictate one’s entire day’s trading.
Another common mistake is to chase gaps. Markets often open higher but the best time to act on such a development is not immediately. The first fifteen minutes of a trading day are the most volatile and provide little reliable information about the day’s direction. Patient traders often sit out this period and wait for the market to find its direction.
A third commonly made mistake is to ignore liquidity. Large jumps in price can occur in the first hour or so of a trading day. Bid-ask spreads can also be quite wide at the beginning of the trading day, especially in small stocks. So placing market orders at the open can lead to poor executions. Limit orders are a better alternative.
Building a Repeatable Process
A repeatable process for analysing the early trading session involves a few key steps. The previous day’s closing level and important support and resistance levels are noted. The offshore price of futures is then studied and adjusted for the premium. This gives the effective gap. Other overnight developments, including global markets and commodity prices, are studied. Domestic developments are then factored in. A pre-departure decision needs to be taken on when to act, including what levels to watch out for.
Having a written-down plan (even if it is a few bullet points) ensures that one does not get carried away by emotions as soon as the market opens. It also helps to keep a log of what worked and what did not. It is important to avoid getting sucked into the noise of the market and take decisions on the basis of one’s pre-departure plan.
Keeping Perspective
For the long-term investor, the early morning drama is largely irrelevant. Companies grow based on their earnings power and not on the basis of early morning gaps. A systematic investor can largely ignore the noise of the first hour and spend time focussing on more important issues.
For an active trader, understanding the mechanics of the early session provides important pointers. But it must be remembered that these pointers are only one part of a broader set of decision-making tools. The first hour of a trading day is only one hour. Keeping this perspective helps keep the early morning noise in its proper place.
