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FRED
GOODMAN'S KEY INDICATORS FOR INVESTMENT SUCCESS
Most of the time, orders will be placed before the market opens because we will have decided to make a trade based on technical considerations, and may not have the time to watch the market all day. However, on occasion, when a stock has been volatile we may consider it worthwhile to spend the time needed to attempt to get the price possible. At such times one technique that has proven useful is to note the high and the low reached during the first 30 minutes of trading (see left arrow below) and to complete the trade based on a violation of that trading range when it occurs. One has to use judgement to determine what constitutes a violation, a couple of pennies in a stock trading at 60 is not the same as it is for a stock trading at 10. Between 2 and 5 tenths of a percent might prove to be a workable margin. (1 to 5 cents for a 10 dollar stock, 6 to 30 at 60.) Studies have shown that stocks often trade within the range established in the first thirty minutes for the majority of the rest of the day, and that in many cases the trading range is not violated. In those instances an effective strategy is to trade towards the end of the day -- as close to the top (selling) or bottom (buying) of the range as possible -- without waiting for an upside penetration. One has an opportunity to use judgement in interpreting the opening range. For example if the range is violated immediately after the 30 minutes are up, it is reasonable to use the extent of that violation to define the range instead of limiting it to exactly 30 minutes. In this example the top of the trading range was taken as the high of the first bar after the 30 minute period (first arrow). No buy was made until the third arrow since the second one did not violate the initial trading range.
However, if the range has not been violated one has the option of going through the entire procedure again the next day. This is an especially good choice if the next day is a Monday for selling, or a Friday for buying since these are traditionally the best and worst days other variables held constant. (See October 5, 2006 report.) Marvell (MRVL) is an example of a stock that moved above its 30 minute trading range almost immediately. The sale is then based on a trailing, mental stop loss. As the stock advances, one raises the price below which the sale will be made. In this case the second arrow marks the time of the sale. Each bar represents 5 minutes of trading.
In the case of Intel (INTC) it wasn't until 45 minutes after the opening 30 minutes ended that the trading range was violated, and in this case it was to the downside. The sale should be made as soon as that violation occurs.
We bought the Diamonds (DIA) ETF that tracks the Dow Industrials, on Thursday, October 5, 2006 at 118.63 near the end of the day when it violated its mental stop just after 3 PM (see left arrow). However, I thought it would be instructive to see how it would have worked out had we waited until Friday -- since it has been found to be a good day to buy -- and employed the same technique we have been discussing. As is so often the case, most of the trading on Friday was confined to the range established in the first thirty minutes -- DIA traversed it three times during the day. The ETF gapped down at the opening, and based on that alone, many traders would not have bought unless it moved back through the gap and traded above it. Under that rule the position would not have been taken, since the high for the day was at 118.57, two cents short of closing the gap. (Pink arrows.) However, we are considering a situation in which a decision had been made to acquire DIA, so we were simply looking for a good entry point. The first mental buy stop is set at 118.31, the first interim high after the 30 minute trading range was determined (second black arrow). The purchase would have been made when that stop was penetrated around 10:45 (third black arrow).
Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at Fred@MarketMonograph.com. The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information. 
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