When the market is positive and moving up, there have been any number of days when it opens with a fast upsurge or a gap open. Because of the strong open, there may be one or more (sometimes many) of the plays hit their buy targets in the first 5-30 minutes of the open. Of course, during that time it is often hard to gauge the market and certainly near impossible to tell if it is "opening enthusiasm'" or real buying power that is moving the stocks. What do you do in such cases? (February 16, 2002)
This is a great question and one of the most difficult parts of investing. One thing we always, always try to instill (and it took awhile to learn) is not to get impatient. You see a stock hit the buy point early and start to run higher. The urge is to avoid missing out and you jump in. Then the move dies out or it runs higher only to come back down and test before taking off again. The worse case scenario: the market gaps higher and then reverses on you and continues to fall.
A rule of thumb we have is avoiding jumping in during the first half hour unless there are some very compelling reasons to get in on particular moves (e.g., company ups its own earnings estimates in a strong market). Sometimes that goes for the first hour. There are a few reasons for this. During the opening half hour, market makers and specialists are trying to determine the price for a stock and its options. They may want to accumulate some more shares and push prices lower. They may want to get rid of shares so they push it higher. I don't like to be a guinea pig in setting the day's prices.
Another concern is the gap higher and then the crash lower. We always prefer a softer open, building as the session wears on. In choppy markets such as this one a gap open is not something to chase. Further, even if it does not lead to a reversal and a close lower, we almost always get a test of the buy points during the first couple of hours. That gives us a chance to look at the move higher, see the test, and see the stock start moving up from there. Looking at the overall market we can then get a sense of the strength of the move and we can also take a look at the volume thus far. That does not mean we have to wait around checking every five minutes, we can let a half hour go by, check with the broker, and if the market is still coming back, we can wait. We already know the buy point, support, resistance, volume, etc., so we can find out where the stock is now, the high, the low, the volume, and we have a pretty good idea of what is going on. There is also the alert service where we take a hard look at what the market is doing early before we start issuing alerts.
By waiting we will miss a few trades because they will run away from us. Still, we prefer to take as much chance out of the trading as possible because playing the percentages usually means a pullback is coming to test a move. That is the first entry point where we often take a partial position (half or our intended position on the play). Then we check in before the close and look to see if the move is looking the way we want, i.e., holding the buy point and moving toward the upper end of the range on strong volume.
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