Tuesday, January 26, 2021

The late Friday “Rip” and the Friday Effect

We’ve written often about the Friday Effect, including this description earlier this month:

The Friday Effect is something MrTopStep noticed earlier in the year and it happened again on Friday’s close. It doesn’t matter if the S&P is up or down on the day, whether the S&P is short-covering into the close or it’s doing just like on Friday, chopping higher. What I have noticed over several weeks was the S&P futures just taking off to the upside going into the 3:00 PM CT cash close. I don’t know enough about why it happens, but I think it has to do with the late-day futures flow rather than the actual cash market.

The Friday Rip is the fast, dramatic move that happens on Friday afternoon near the close. It is generally to the upside, but sometimes involves a sell-off. The MiM often shows a strong signal in one direction. If the market hasn’t yet fulfilled the move the MiM is predicting, there’s a good chance it will wait until almost the last possible minute and then RIP! hit every buy or sell stop and run. FridayRIP

All of which is to say, “Beware.” Do not leave a trade unattended just because it’s Friday and the market has slowed down and there is very little volume. Remember the thin-to-win rule. Traders can more easily push a thinly traded market around and buy and sell programs often are programmed to take advantage of such opportunities. Even if you’re leaving a trade on over the weekend, make sure your stops are placed such that you don’t get stopped out by a dramatic rip in a way that you hadn’t planned. Either stay on the market or be prepared for a big fluctuation in price.

What causes the rip? It could be a combination of factors: traders closing out positions they don’t want to carry into the Sunday electronic session, a Friday in which funds must adjust their books and want to take on positions they want to report and get out of positions they don’t want to show.

Traders have noticed for decades that what happens on Friday near the close tends to continue on Sunday evening and into Monday.