A powerful method for tracking the smart money is called the Open Range strategy. This strategy is executed by drawing two horizontal lines for the daily range of the S&P 500 on the first trading day of the month, and the monthly options expiration Friday. After the range on one of these days is drawn, we then track where the market closes relative to our horizontal lines to determine what the smart money is doing.
In the days following the open range day we are looking to see if the S&P 500 closes more than 20 points above or below the range set. Whichever direction this occurs in first will set the bias for the market direction until the next open range day occurs.
For example, the first trading day of the month in January 2019 was January 2, 2019, thus we draw the Open Range horizontal lines:
The range of the horizontal lines (yellow) are the low which is drawn at $2467.47, and the high which is drawn at $2519.49.
The next day, January 3, 2019, the S&P 500 closed at $2447.89. $2467.47 – $2447.89 = -19.58. The close was less than 20 points so we don’t have a signal.
It’s not until January 7, 2019, when the S&P 500 closed at $2549.69 do we have a signal. $2549.69 – $2519.49 (high of Open Range day) = 30.2. This suggests that the smart money is bullish on the S&P 500. This bullish signal stays in effect until the next Open Range day on options expiration Friday which was January 18, 2019.
The new Open Range is the lower horizontal line at $2647.58. The upper horizonatal line is at $2675.47. The market traded sideways within the range and finally gave a bullish signal on January 31, 2019 when the S&P 500 closed at $2704.10. $2704.10 – $2675.47 (high of Open Range day) = 28.63.
The reason that this Open Range system suggests what the smart money is doing is that smart money often trades on the 1st day of the month and on options expiration Friday every month. It’s not that retail/amateur traders do not trade on these days, it’s that smart money tends to dominate the overall market volume on these days. The first day of the month is when new money flows are directed toward mutual fund managers. Options expiration Friday is self-explanatory in that smart money is more likely to trade options than retail/amateur traders. Options traders must decide before an option expires whether to exercise the option, close the position to realize their profit or loss, or let the contract expire worthless.<< Back to Glossary Index