Stocks prices need not always follow a same pattern because there are large number of factors that affect the price of a stocks. This includes the phenomena that we see on most of the days which is dropping at market open and then recovering, or spiking at open and then declining. The question arises in the mind of every trader, why does this happen?
The major cause of the price movements on opening is the overnight developments. News, events, or economic data released after market close can lead to overnight reactions from traders and investors. When the market opens, there might be an initial reaction to this new information, causing prices to move sharply in one direction. However, as the trading day progresses, traders reassess the information, leading to a retracement if the initial move was exaggerated else the price can keep on moving in the same direction till market close.
The second reason can be the surge in trading activity, resulting in higher volatility and temporary imbalances between buy and sell orders. This can cause prices to move sharply in one direction until the order flow stabilizes throughout the day.
Many traders have intraday strategies that are implemented at the opening of the market. Many algo traders implement their algo trades too. Some traders employ strategies that involve taking advantage of the initial volatility at market open. For example, momentum traders may buy or sell stocks based on the early price movement, contributing to spikes or drops at the open. As the day progresses, these traders might unwind their positions, leading to a reversal in price.
Then we have the Institutional investors, such as mutual funds and pension funds. They often execute large trades at the beginning of the trading day to minimize price impact. These trades can cause significant price movements at market open, which may partially reverse as the day goes on and other market participants adjust their positions accordingly.
Market sentiment and investor psychology play significant roles in price movements. A strong positive or negative sentiment at the open may drive prices sharply higher or lower initially. However, as the day progresses, rationality often prevails, and traders may reassess the situation, leading to a reversal in prices.
Technical analysis tools and indicators are widely used by traders to identify potential entry and exit points. Certain technical levels, such as support and resistance levels, may come into play at market open, leading to sharp price movements. As the day progresses, traders may reevaluate these levels, leading to a retracement in prices.
So there is no single reason or cause for this behaviour of the market at the opening.