Opening Patterns and Reversals
Institutional traders have orders to fill before the day opens, and they want to fill them at the best possible price. For example, if they have mostly buy orders and the market opens with a large gap down, they will buy immediately if they feel that the lower open represents a great value that won't last long. If they believe that the market will trade down a little, then they will wait to buy lower. If the market instead opens with a gap up, they might decide that the market should pull back. If that is their belief, there is no incentive for them to buy now because they expect that they will soon be able to buy lower. This creates a sell vacuum, and the market can move down quickly since the institutional bulls are simply waiting to buy at a more favorable price. Invariably, they will wait until the market reaches a support level like the moving average, a trend line, a measured move, or a swing high or low. If enough institutions have order imbalances to the buy side and if they all begin their buying at around the same level, the sharp sell-off can reverse up strongly. The sell-off wasn't as much due to strong bears as it was due to strong bulls who were simply waiting for the market to fall to a support level, whereupon they bought relentlessly and overwhelmed the bears. This is the vacuum effect; the market got sucked down quickly to a level where there were lots of strong buyers waiting.
The opposite happens on days when the institutions ...