Where is the close?

For stocks, the closing price is generally considered the single most important price point for any trading day. It’s considered so important, in fact, that some charting services offer “close only” charts, where rather than a price bar or candlestick, each day is represented by a dot on the chart, signifying the final point in that day where a buyer bought and a seller sold that stock.

Note that, in this electronic and connected modern trading environment, shares do change hands after the close. However, such after-hours trading is logged to the next trading day, keeping the close pristine.

In market psychology, the close sums up what traders are currently thinking about a particular stock and its underlying company. Traders have observed this stock during the day’s ups and downs, noting the amount of selling it suffered to force it to its low and how much buying pressure was required to drive it to its high.

As the end of the trading day approaches, these traders must make a decision: do they buy this stock or decline the opportunity? If they already hold this stock, do they keep it overnight, in expectation of further buying (or selling) pressure driving it higher (or lower)? This decision is based entirely on the anticipation of additional profits, and if these traders don’t foresee that scenario playing out, then they will not purchase (or sell) the stock, nor hold it overnight.

In short, only if these traders are convinced the stock will go higher (lower) tomorrow, will they drive the price ever higher (lower) as the close approaches today.

For this reason, traders assign great significance to the high (low) occurring at the close, and even more significance if that happens over several days. Although such a surge is likely to be followed by profit-taking from those traders who entered the movement early, it remains a clearly bullish (bearish) signal.

When last analysed, Macarthur Coal Limited (MCC) had surged to a new 52-week high at 17.17, touched 12 April, on a buyout offer from Peabody Energy. The bid was pared lower following the announcement of the new resources profit tax and the stock’s price tumbled back to touch its bullish trendline, as shown on the chart, below: