Is it possible that traders have a secret code that they pass along to each other just before a stock makes a major move? If you believe in conspiracies, you'll believe in Outside Days.

Each day that a stock trades can be divided jn to one of four definitions. A Rally Day occurs when the stock makes a higher high and the same or higher low than the prior day. A Reaction Day takes place when a stock makes the same or lower high and a lower low than the prior day. An Inside Day happens when a stock makes the same or lower high and the same or higher low than the prior day. And an Outside Day is when the stock makes a higher high AND a lower low than the prior day. Now, there is one confusing rule. Inside and Outside Days do not count as "prior days".

Example 1.-GENERAL MOTORS

Date               High                   Low               Definition
2/6/02              49.83                48.27             Reaction Day
2/7/02              49.17                48.26             Reaction Day
2/8/02              49.85                48.07             Outside Day

Here we have GM making an Outside Day on 2/8. As a rule, Outside Days are usually good for quick 5-10 point pops, depending on stock price. In the past, the actual direction of the move has been hard to determine. In other words, GM could have moved as high as 55 or as low as 43, simply by tacking on 5 points to the high or subtracting 5 points from the low. However, and I apologize that I cannot really discuss it here, I have found some good consistent rules for determining direction. In this case, you would have bought GM and held on for 55. Sure enough, 10 trading days later, GM was over 55. Imagine what the return would have been on the February 50 calls!

One stock that has given three great Outside Day signals recently has been DIRECT FOCUS (DFXI):

DFXI

Date               High                   Low               Definition
4/30                 44.95                42.51             Rally Day
5/1                   45.59                43.50             Rally Day
5/2                   45.89                43.28             Outside Day

With this signal, you would have shorted DFXI at about 43. The target of 38 ( a 5 point move) was hit on 5/10. The May 40 puts would have provided a huge profit!

An Outside Day is an aberration and when you see one, it could be a signal that a quick pop is going to happen in a particular stock. The Outside Day often shakes out weak positions and allows the knowledgeable investors to get on the right side of a trade at a favorable price.

Alan Friedman is Editor of The WOLF, MOMENTUM ON-LINE and the brand-new HomeRun Options service which will incorporate Outside Days. For information, contact Mr. Friedman at wolfwinners@aol.com or visit The WOLF at www.thewolf.cc