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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: eichler who wrote (52969)	6/3/2000 12:55:00 PM
From: UnBelievable	Read Replies (1) \| Respond to of 99985

Gains on Negative Money - Short Sale Implications Money flow is the sum of the dollars of sales on an up-tick minus sales on a downtick. The simple assumption is that sales on an up-tick are being bought while sales on a downtick are being sold. The expected result is that price rises are associated with positive money flow and price declines are associated with money flow. Price gains on negative money flow are not ?normal?. There are circumstances when it is observed when it is not indicative of circumstances that may indicate "distribution" and the good potential for near term declines. This is especially true in volatile markets where a stock may see significant price fluctuation during the day. A simple example would be an issue that has been declining most of the day and towards the end of the trading day there is news that causes the stock to go up and close above the prior close. Most of the trades during the day where on price declines but the stock closed up for the day. Assuming the company actually received the patent on faster than light communications you would not want to short that issue. Another example is a stock which gaps up in the morning but essentially is declining all day (a not unusual variation is similar behavior with a second spike up near the close). While this pattern may indicate that the MM is attempting to engineer price gains into the stock (and can frequently appear to be orchestrated with Analysts and News releases) in this market is not a good bet that it won't succeed. The stock becomes of more interest when this type of price movement (Gaps ups at opening, spike ups at closing, a declining trading market throughout the day) is observed over a longer period of time and would seem to account for most gains since previous support. While egregious price engineering may provide a set up for the Short Sale, the most interesting are cases when this is occurring in association with distribution, since in those cases the MM is working to increase the price at the same time adding to the supply of the stock (at a time when there is little or no reason for an increase in demand). A number of factors have combined which cause this situation to be observed much more frequently. These include: -The need for much greater distribution - In general I think of distribution as the selling of additional new shares to the market. Such shares include those taken by the Investment Banker in association with their Underwriting function, those owned by company insiders or early investors (VC's, Providers of Mezzanine financing, private investors), or authorized but not issued shares which were held by the company. To some extent they also include shares being sold by a mutual fund -The transition from the Buy Low-Sell Hi investment style to the Buy Hi - Sell Higher (Mo. M0.) style. -Changes in rules by NASDAQ concerning the obligation of a MM concerning the number of shares that they must be willing to By-Sell at the posted Bid-Ask from 1,000 to 100. While it is clearly the legitimate job of the MM to maximize the price of the shares (think auctioneer) when these efforts are not made equally on the part of all sellers, or activity is engaged in which promotes the price at the expense of the other obligation of the MM, which is to maintain a market for the security, than IMO the MM is not acting appropriately, and the significant potential for a impending price decrease may indicate a good Short Sale opportunity. The way a price can increase with negative money flow is that most of the sales on the upticks are small sales and the sales on the downticks are large. I think of it as priming the pump or baiting the dog. Very simplistically the MM chooses to open the stock above the close (Gap Up) by establishing an initially higher Bid and Ask. To the extent that there is trader interest at those levels the MM limits the sale at that price to a small number of shares and steps back to a higher Ask. If too many other sellers enter at the price the MM will absorb some of those sales at the higher price as well as work to expand the spread, making the available Ask to buyers higher than it otherwise would be. Once the price has been increased enough (again it is not unusual to see Analyst reiterations and company PR to encourage buyers occurring at the same time) the MM will begin to sell the distribution shares into the Mo Mo market. Most of these sales are larger and on downticks. When the price begins to fall too much the distribution is slowed or halted, the price increased through smaller sales to particularly interested buyers or if all else fails to themselves until the price has increased to the point that the cycle begins again. At the end of the day you have price increases with most of the shares traded on downticks. The significant increase in gap ups and downs and the inconsistency in daily trading volume are also consistent with the increased prevalence of this type of activity. For me the data is useful in aggregate to get a better understanding of what may be behind overall market moves. It also is useful in identifying candidates for short sales all though it can be relied upon. It is essential that once a stock has been identified that it be evaluated carefully in terms of the intra-day trading patterns as well as other fundamental and technical factors. When I see it associated with insider sales, increased analyst attention, PR activity from the company, and fundamentals which seem particularly out of line with the share price I have found that it is well worth while spending some time to analyze the intra-day trading. Disclaimer: The views expressed above are my opinions. They may be right and they may be wrong. The situations described may exist or they may not. To the extent that one would interpret what is said as suggesting that there is collusion between Investment Bankers, Money Managers, and Investment Analysts', even when they may work for the same control group - that would be the readers'interpretation. To the extent that one would interpret what is said as suggesting that NASDAQ has acted in way that is not in the interest of individual investors that would also be the readers'interpretation. I don't know whether in fact either of these two interpretations are correct or not. Investing, Trading, Speculating, Gambling all involve the risk that you can loose money, even more than you plan on loosing. Get all the advice you can. Don't do anything you don't personally understand and believe.