Saturday, May 28, 2005

Why is the close price significant?

A couple of weeks ago I was talking with my friend Chris about why people consider the close price to be so significant. Chris is a "buy and hold quality small-caps" variety of investor, and I didn't have a good rebuttle when he said that we could chart the price of the stock at noon everyday, or any other time for that matter, and it would be no different than charting the close price. But the conversation got me thinking.

A few days later I brought the subject back up and we considered that people who hold overnight were often being compensated the next morning for taking risk through the period of illiquidity. Who would want to buy the night before the next black monday? People who want to sell to the chicken littles the next morning after they all discover that the sky didn't fall overnight.

I didn't think much more about it until tonite, there was an article on yahoo finance about a study done on the SPY going back to 1993 comparing a buy and hold strategy against buying at the open and selling at the close, and buying at the close and selling at the open. Guess which one outperformed? Buying the close and selling the open. The author of the study also points out that this stacks the odds against daytraders who buy in the morning and sell at the close, which was the worst performing strategy of the three with a negative overall return!

So going back to the original question, what is the significance of the close price on charts? The close price gives you the most information about how traders assess the risk of carrying the stock overnight. The stronger the close, the less risk the position is percieved to have. I'm curious to see how this changes as liquidity improves overnight due to electronic exchanges and a trend toward a 24 hours a day market.


At 4:55 PM, Blogger Michael Taylor said...

Interesting article. If overnight produces positive results...just think what holding over the weekend generates!!! :)

I think this fits in well with being where they ain't.

Have a great weekend!


Post a Comment

<< Home