Serious traders get up at 5am and check out what is happening on Wall Street
You follow what is happening on overseas financial markets and let these developments provide you with guidance on making your Australian trading decisions.
Market watchers call it a top down approach to trading and investing.
According to David Taylor, market analyst with CMC Markets every trading day the Australian market is guided by leads from overseas. It could be what has happened to prices on the London Metals Exchange or in Europe markets or Wall Street or in China.
Every day between 10pm and 5am Australian time the European and American activity will influence what happen on the Australian market on the following day.
That said, this influence usually lasts for only the first half hour of Australian trading, between 10am to 10.30am. By 10.45am Australian market influences become mainly Australian company news and anything that is happening in Asia.
While top down market influences last for a relatively brief period, Taylor says it is often the busiest period of the day.
Many serious traders make their most important decisions in the morning. They get up at 5am and check out what is happening on Wall Street. They study the action from about 5am to 9am and then make their Australian market decisions, looking to earn as much money as they can from the opening.
This is the time when Australian share price index (SPI) futures will set the scene for the Australian market opening.
Taylor says traders should only ever use the SPI as an opening indicator and not expect any more than this. It should never be regarded as an indicator of how the market might perform over the whole day.
He says SPI is usually a reasonable indicator to how the market might open. Not that traders should expect the open to match the futures. If the SPI is up 30 or 40 points, this can be interpreted as suggesting a firm opening. Such strength is more likely to see the market open perhaps 20 points higher.
The post 5am period can also see a lot of important fundamental market influencing decisions still being made “live” including such events and American interest rate announcements from the US Federal Reserve’s open market committee. Many traders put a lot of effort in trying to understand the language being used by such bodies.
Taylor says that if metal prices have been strong overnight, especially copper, and this coincides with good support for BHP Billiton and Rio Tinto in London and maybe New York depository receipts, this will generally mean a bullish start for Australia two big miners.
A firm gold price will be tend to be bullish for Newcrest and Lihir Gold at the open, while Woodside, Santos and shares like Worley Parsons will often do well if overnight oil prices are strong.
Taylor says other than any Australian company news that comes out during the day the next most important period for market watchers will tend to be Dow Jones futures activity from about 3.30pm Australian time. This action will often see the Australia market set the scene for the London and American markets opening.
If Dow futures are down strongly at the open this can often result in a weaker finish for Australia. Vice versa a strong Dow can help the Australian market finish the day strongly.
So how much value should traders and investors put on overseas market factors? Taylor says you can often pick up important fundamental information that is worth taking note of, such as firm metal prices being positive for resources shares.
Similarly any indication from the US Federal Reserve of a change in its views on interest rates – a decision to perhaps consider an interest rate increase - can result in the Australian dollar doing back flips and cartwheels through the morning session.
Taylor says important overnight developments on various fronts can influence the confidence and the risk appetite of Australian traders. It can lead to a focus on particular market sectors or prompt traders to rotate to another sector.
As far as market sectors are concerned, Taylor says it tends to be the case that the materials, energy and finance sectors will often move together. Alternatively traders will switch to healthcare and consumer staples like the major retailers.
As far as any guidance from particular share markets, Taylor sees European markets tending to move as a group because they are increasingly under European Union economic control and European Central Bank monetary control.
As far as Asian markets are concerned they are less coordinated, especially the Shanghai market which can independently be very volatile, especially when compared against the Hong Kong market.
Japan’s Nikkei index can also be a lone soldier because of the influence of the yen while Wall Street continues to be the world share market that is most likely to set the pace for other markets.
John Wasiliev is a columnist and personal finance writer with the Australian Financial Review. His writing interests include derivatives and all areas of personal finance, especially self managed super.
