Stock market commentary, analysis, insight and opinion of the RightLine Editors is available every Tuesday/Thursday evening & Saturday
afternoon. The following is excerpted from the:
October 22, 2019 - The RightLine Report
Notes From The Editor
The Ups and Downs of Making The Market
Market makers and specialists use technical analysis to locate potential reversal zones whenever they feel the need to "sweep" the street in search of profits, commissions and brokerage fees. They stimulate orders by offering large amounts of stock for sale (shorting), which in turn motivates other traders to sell shares they own or to short shares that they borrow. This creates downward price momentum, which forces prices even lower. Once there is enough profit on the table to cover their shorts, they buy back the stock and lock in their gains.
In my experience, the reversal points are usually predetermined. Some of these reversal levels are easy for traders to anticipate. They usually line up with previous highs and lows, or pivot points like the 13, 22, and 50 Exponential Daily Moving Averages. Others are less obvious. Trend lines, Bollinger Bands, Fibonacci overlays, and other technical tools are used to locate "hot spots." Keep in mind that wherever two or more of these hot spots converge, support or resistance is even stronger.
In the case of "down-then-up" sweeps, the reversal point is often the closest logical support that doesn't create too much panic. After all, market makers and specialists don't usually intend to push the market to it's knees, they just want to create enough action to make a handsome profit from their shorts, plus get their share of the commissions and brokerage fees resulting from all the commotion.
Every day is business as usual for the hundreds of member firms that perform as Nasdaq Market Makers. Name any major brokerage. The odds are almost 100 percent that the firm is a Nasdaq market maker. Yes, even YOUR broker is a market maker.
On the New York Stock Exchange you'll find hundreds of "Designated Market Makers" (DMMs) formerly known as "specialists." Though a slightly different breed of market maker, they too are allowed to trade on their own behalf - both long and short.
Over the years I've learned that it doesn't pay to be stubborn in the face of determined market makers and DDMs. This group wields an immense amount of power. As traders we can assume they are behind - or at the very least involved in - most price moves of any significance. Fortunately, we can anticipate the support and resistance points. This allows us to prepare for likely reversals or breakouts at the familiar junctions.
One measure of a trader's strength is the ability to quickly adapt and go with the current price flow. To a large degree, this is what is meant by the saying, "let the market tell you what to do" - a statement that holds true for ALL traders and investors!
Thomas Sutton, Editor
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