For most investors, the stock market is like one big crystal ball--that is, it is hard to predict the sentiment of the market. Even the most savvy investors have difficulty interpreting many of the technical and fundamental indicators that are used to gauge the direction of the market. There is, however, one relatively simple way to predict how the stock market will open each trading day.
Familiarize yourself with the futures market. Futures are long-term options contracts; that is, they give an investor the right to buy or sell a security in the future at a predefined price. When investors buy a futures contract for a company's stock or index, they are essentially betting on the future direction of the value of that stock or index. Among other things, futures are traded on the value of the Dow Jones Industrial Average, the Standard & Poor's 500 index, and the Nasdaq composite index.
Look up pre-market data each morning before the 9:30 a.m. (Eastern time) opening of the two major United States markets, the New York Stock Exchange and the Nasdaq. This data is available on any major financial research website, often beginning at 8:30 a.m. or earlier. CNBC.com, for example, provides data on the Dow Industrial futures, as well as the S&P and Nasdaq futures (see Resources for a link).
Interpret futures activity for these three major stock indexes. For example, when the price of Dow futures contracts are rising, traders interpret the move as a signaling a "bull" or higher open for the Dow. If the price of futures contracts are going down, traders believe the market is set to open lower. The higher or lower the change, the more strength there is behind the market open.
Tips & Warnings
- Nothing is guaranteed, and investors can change their minds in seconds. Pre-market data for the Dow, S&P and Nasdaq futures provides a powerful signal for how the markets may open, but events immediately preceding the opening, or immediately after, may cause the indexes to change direction.
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