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Market Market
Maker Mischief: A Case Study |
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New Century Industries (OTC BB:
NCNC) had a pretty good first day post OTC Journal coverage
launch. I am going to stay with this one for a while- I believe the stock
is very cheap and the company has great growth prospects ahead with a booming
core business and the potential of the Boeing 787 Dreamliner in the cross
hairs. Boeing has the next five years of production already scheduled,
and they are going to need a lot of engine components.
NCNC traded 522,387 on Thursday
after the company announced its joint venture to manufacture engine parts
for the 787, and the OTC Journal launched coverage. It was the highest
volume day in well over a year, and I felt the stock traded very nicely.
It gave everyone a chance to own it who wanted to without paying too much.
Sometimes, that doesn't happen- on big volume the sometimes stocks trade
up too quickly.
About an hour into the trading day
the market makers tried to pull one of their tricks to suck in sellers,
and it's worth having a look at. It didn't work for them this time, but
it often does.
Here's a chart of NCNC's trading
action on this past Thursday. The chart is a little hard to read, because
it shows the action in the stock on a minute by minute basis. The time
line you see at the bottom in Pacific time, which is why the opening trades
are at 6:30AM.
Note the high volume bars at the
bottom of the chart in the first few minutes. There were plenty of orders
at the open, and the market makers starting filling them at about $.75.
I can almost guarantee the market makers were going short at this time,
selling the shares they didn't have an hoping to buy them back later at
a cheaper price, thereby scalping a few pennies. To their dismay, the buyers
kept coming.
If you're short the stock and you
want to buy it- your common sense suggests you should bid the stock up
and look for sellers. You aren't thinking like a market maker. Market makers
do the opposite because they understand retail investor mentality.
After shorting a whole bunch of stock
to investors for the first hour, the market makers were looking for stock.
At about 7:30; one hour into the trading day, the bid on NCNC drops
fairly significantly. All of a sudden, for seemingly no reason at all,
the bid drops to $.66 from $.72. There are no trades to explain the drop-
it just falls.
Why would it drop?- here's why- it's
a big psychological game. The market makers are trying to "shake out some
stock"- they are trying to psychologically convince the market the stock
is about to fall apart, and are trying to bait some sellers.
Despite dropping the bid to $.66
from 7:07 to 7:31, the stock never prints there. In fact, for the entire
half hour, there are only trades on the offer. After 1/2 hour, the market
makers throw in the towel, and bid the stock up.
Before 8am the stock makes its high
print of the day at $.80 because the market makers gave up let it go where
it wanted to go in the first place.
So, here's the moral of the story-
on high volume days, don't be sucked in by market maker antics designed
to spook you into parting with your position at the wrong price. Always
use a limit order, and if you have to sell try to do so from the offer
side.
Market makers are professional trades
who will scalp a small trade for beer money, so don't be suckered in.
What does this mean long term? Absolutely
nothing. It the company continue to grow and prosper, and we have a reasonably
good market environment, the investors should do very well. If there isn't
another decent volume surge in the next week, the stock will probably drift
down on lighter volume next week and the market makers will cover slowly.
That's how they make money.
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