Trading the Final Hour

I remember back in the spring of 2009, the final hour was the best hour to trade. It was full of volatility, but also full of huge predictable profits. For about two weeks, there was a simple pattern that guaranteed profits: whichever direction the market was trending going into the final hour was the way it would finish.

It was the biggest and most predictable momentum play I had ever seen. If the market was moving up as it approached 3 PM, and was still moving up, I would buy calls on the Diamonds Trust [DIA:NYSE], an ETF that tracks the Dow Jones Industrial Average. If it was trending downwards, I would buy puts.

And now, it seems like the final hour has become trader's heaven again. In the last five trading days in the United States, we have seen the last hour trade with momentum reversing the day's trend.

Thursday May 20: The Dow gained 100 points from 1 PM to 3 PM to reach 10,202. In the final hour, it lost 134 points to finish at 10,068.

Friday May 21: The Dow lost 100 points from 12 PM to 3 PM to reach 10,092.00. In the final hour, it gained 101 points to finish at 10,193.

Monday May 24: The Dow was flat through out the day and at 3 PM was 10,130. In the final hour, it lost 85 points to finish at 10,066.

Tuesday May 25: The Dow fell below 10,000 and was down almost 200 points at the open. In the final hour, it moved up 96 points to finish at 10,043, down only 24 points on the day.

Wednesday May 26: The Dow surged 100 points on the day and at 3 PM was 10,070. In the final hour, selling hit the market dropping it 96 points to close below 10,000 for the first time in four months.

Today, the market did not sell-off after the market climbed 200 points, but in the last hour, buying picked up and moved the market up another 86 points, most of that occurring in the final 30 minutes. Easy money and DIA options increasing 10-20 per cent on late-day momentum.

I don't know how long this last-hour trading frenzy will continue, but it is something I did recognize, and I thought I would post it up for others. Some believe it may be short covering on up days and bargain hunters on down days that is creating volatility.