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Technology Stocks : General Magic
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To: Rob Anderson who wrote (6175)5/14/1999 11:15:00 AM
From: RidgeRunner  Read Replies (3) of 10081
 
Hi, Rob.

What follows has nothing to do with the merits of General Magic as a company. (I don't know enough to have an opinion!) It is strictly a technical analysis observation based on the GMGC daily price chart.

My comments regarding "filling price gaps" referred to the tendency of most stocks to come back and fill a gap on a price chart before resuming the nominal trend. For example, I noticed that the GMGC chart shows two recent price gaps, a big one at about the 3&5/8 level and a smaller previous one down around 3&3/8. These normally result from a move that catches the MMs by surprise. They may get a bunch of buy orders and few sellers, so they must sell short or sell from their own cache of shares to support the market as it moves higher.

At some point they are stuck on the wrong side of the market with large paper losses. What they will try to do is then drop the price using small lot trades (hundreds vs thousands of shares) to incrementally work the price down to where they can buy enough shares cheaply to cover their previous sales. If this is done quickly it is a "shakeout" because it scares the small investors who then sell their stock in fear that prices will go even lower, thereby adding fuel to the fire forcing prices lower still. Eventually the MMs can purchase enough stock at a low enough price to cover their previous paper losses and maybe even make some money or establish a new cache of shares before they allow the market to move back up.

This manipulation is the price we pay for liquidity in the marketplace. It can also be predictable. That's why I asked if anyone on this thread was concerned about the vulnerability of the stock to this gap-filling potential. If you are a long term holder of the stock it may not matter. If you are a short term trader it can be pretty important. For some of us it may also be a buying opportunity.

Best wishes,

RidgeRunner
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