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Market Manipulation   (March 8, 2007)

Knowledgeable reader Rick R. sent in a question which occurs to all of us who trade stocks: Is this stock being manipulated?

I have long suspected widespread manipulation in the equity markets and have a question for you. This evening I noticed something I've never seen before in my many years of trading. The afterhours charts of many market moving NASDAQ issues are painted with extreme readings - in all cases, wildly moving, impossible to trade movements that effectively render technical indicators useless. I've enclosed two charts as examples - note the range of the price channels in each. Other charts look much the same across the NASDAQ landscape.

Any ideas as to why this would be happening now?
Since many readers (including Rick R.) are far more experienced traders than I am, I sent the question to frequent contributor Harun I. for his comments:

The fact that these bars appeared in multiple securities at the same time could mean the vendor’s software may have had a problem. Also check what kind of volume was trading, during light trading the markets are easy to push.

Manipulation and stop running are trading facts of life. No government agency nor any amount of legislation is going to stop it. Skillful manipulators move an instrument enough to draw others in and liquidate into strength as they uncover stops. This is chess; we didn’t invent it; our job is to understand the game so that we can win.
I then sent Harun's comments to Rick, who confirmed that the peculiar chart action did not appear to result from software errors:

I spotted many charts - both NYSE and NASDAQ with the same patterns. For several, I drilled down to 5 and 15 second intervals, looked at the tape, and they appear to be valid trades. However, I have contacted my vendor (e-signal) as I trade quite a bit and I've never seen this activity before.

Assuming the charts are valid, there were many gaps up today and my best guess was that 'da boys' might have done their best to prep the market for today. Also, I suspect today's activity is a trap as we haven't hit major fib levels for a solid 'bottom'. But hey, who knows. As Bruce Lee said, "Be like water". Flow with it.

FYI - I've attached a 15-second interval chart of Apple. (not shown here--CHS) It's a close up view and is representative of what happened with many securities yesterday after 'closing'. If valid - and not a glitch - this was a well orchestrated effort that began and ended at the same time for many securities. (emphasis added)
Here is my two cents (adjusted for inflation, 2-tenths of a cent): I too have noticed some very high-volume after-hours trades recently in biotech stocks I follow. Over 10% of the daily volume traded hands AH, 150,000+ shares, where normal AH volume is a few thousand shares, if any. Suspicious? Consider the chart of the BTK, the biotech index:

Nice little downtrend--especially if you're accumulating positions. My own sense is this: an established biotech rises in the course of trading, and then BAM, it gets slammed after-hours on no news. It opens weak, hitting stops (pre-established "sell" orders), allowing "smart money" to continue building a big position at bargain rates. The weakness keeps the price just below levels which traders are keyed on--support, resistance, Fibonacci retraces, and so on--so traders stay out of the stock while the "smart money" builds a position.

Then, once their position is complete--let's call it 2 milion shares--then the "nudge" goes the opposite direction. Our "smart money" loads up on call options, alerting traders that something bullish is at work; if the bid/ask is $20 and $20.05, then our SM puts some big buys at $21, then $22, and $23. The bid and ask quickly jump up, lighting up trading screens everywhere because resistance has been overcome and a "bullish move" is now obvious.

Now the uptrend feeds on itself. Traders looking for momentum moves spot the stock, and their buying pushes it to $25. Short sellers start covering, adding a rush of new buyers, and as the stock pushes up various trading triggers--Fibonacci levels, bollinger bands, money flow, and so on--then more "momo" traders jump in. Our SM waits until the stock pushes up against its previous high--let's say it's $30--and then "paints the tape" at the close with some big buying in the last few minutes of the day, pushing the price to a nominal new high.

The next day, the SM repeats the exercise, pushing the stock to a new high, even if it's only a few pennies. After three days--traders look for three days of up or down price action to set a trend--those who look for breakouts to new highs (the Investors Business Daily crowd) now jump in, and the stage is set for the SM to begin unloading the calls and stock position--"distribution." Once they've dumped the 2 million shares--slowly, so as not to move the market--then they short the stock--buying shares they don't own, to be covered later at lower cost when the stock falls of its own weight. Manipulated up, manipulated down--the game works in both directions. Pity the poor "investor" who naively believes in the transparency of markets.

Doesn't happen? You bet it does. In Harun's succinct summary:

How many retail traders are willing to buy an inactive security? The fact that the public often gets aboard late in the game ( the speculative phase or worse, the distributive phase (top)) should at least help explain some of this game. For strong hands that bought (accumulated) the stock, to realize any gain the stock must move in their favor to be sold (distributed) at a profit. From whom did strong hands buy, when and why? And to whom are they going to sell, when and why? People need to think critically about the terms accumulation and distribution.

They also need to consider critically why an issue changes price. Who started bidding higher and why? And, if its so great why are people willing to sell it? Does anyone stop and think why Morgan Stanley is willing to sell 100,000 shares of XYZ. Why does the market rise and fall on sympathy related to one or a few issues regardless of the fundamentals of the sympathetic issues? If you were MSFT and wanted to do a buy-back of your stock, wouldn’t it make sense to send every trader you have down to the floor to beat it down?

Since it would be impossible to know all of this unless you are an insider, Technical Analysis helps as we can see behavior repeat itself and formulate the probabilities and therefore have an “edge”. In my opinion without an edge one is not playing the game but is being the game. And while being the game (fodder for the pros) may satisfy some unconscious desire for self-flagellation it is financially unproductive. Once again I recommend everyone who invests or trades read Reminiscences of a Stock Operator. It is entertaining and educational with lessons about the market that are timeless. (emphasis added)
Thank you, Rick and Harun, for your commentaries on this important topic.

As a lagniappe, here is a succinct article on the PPT, the Plunge Protection Team, forwarded by astute reader H.S.K.: Juicing the Stock Market-- The secret maneuverings of the Plunge Protection Team.

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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