Don’t Trust The Pre-Market

Micron ripped $50 higher this morning before the opening bell.

An $850 stock that all of a sudden was a $900 stock, up 40, 50 bucks in the pre-market. Your eyes go straight to the price. Big green number, big move, something must be happening.

So ask the question almost nobody asks. How much size is really behind it?

At the open, the answer was about two million shares. On a stock at that price, two million shares is nominal. 

Not because the move is fake, but because two million shares does not tell you whether it's real yet. The price looked enormous and the confirmation wasn't there.

That's the whole point, and it holds no matter which way the stock goes. 

This morning Micron stuck. Real volume came in behind it as the session got going and it held its gains. But that volume showed up during the session, not in the pre-market. 

Plenty of mornings that exact same thin pre-market pop rolls right back over and takes everyone who chased it down with it. 

So you can't trust these cash opens as far as you can throw them. The opening print is the loudest, least reliable moment of the day, because there's almost never real size behind it yet. Sometimes it sticks. Sometimes it reverses in seconds. The number itself doesn't tell you which.

Separate the two things in your head. Price tells you where a stock is. Volume tells you whether to believe it. At the open you have the first and not the second, and the morning is built to make you forget that.

What actually tells you something is the order flow once the bell rings. 

If a stock is bid before the open, the odds favor call buying driving it as the session opens up, and that's participation you can measure. That's the signal. The pre-market number is just the bait.

So next time a stock is up big before the bell and your gut says get in now before you miss it, slow down. 

You're not looking at a move yet. You're looking at a price without the volume to back it, and you won't know if it's real until after you'd have already chased it.

Wait for the bell. Let the size show up. And pay attention to the options market. 

Asking the right question before you commit a dollar is the whole game. That one was about reading the tape. There are others that are about your own trade, the ones that decide whether a loss is a scratch or the one you don't come back from.

I put five of them in The 60-Second Checklist That Stops A Bad Options Trade. Five quick checks, sixty seconds, run before you ever click buy. It normally goes for $29.97 and it's free today. 

Get your copy here. 

To your success,
Don Kaufman