A Quick Lesson

I came across this little tidbit in explaining some charts to a member.

Remember Friday I said we were seeing some accumulation in the market and it hinted at a strong opening or first half of the day for the market. Well we had a three day weekend and the accumulation was on the short charts, 1-5 minutes, which is usually market makers/specialists/short term HFTs. Unfortunately for them, we had a three day weekend in the U.S. and while we had Monday off, Asia and Europe were not doing well. As a result, the opening was a gap down, but I wanted to show you how these smart money types are loathe to lose money and exactly how they made their money back today in one specific investment-USO.

 This is the 3C 1 min chart backed up to show Friday, Sept. 2nd. Note the accumulation starting around 2 p.m. and turning in to a leading positive divergence by the close. Some short term smart money trader apparently was expecting a move up today as they accumulated shares of USO in to the close Friday.

 This 1 min chart shows Friday and today. As you can see, USO gapped down quite a bit. However, 3C didn't confirm the gap by moving lower, instead it made a new leading positive divergence high on the open, which means our entity more or less doubled down on their position to reduce the average cost. By the end of the day USO closed off by only .1%-our trader didn't lose any money, but instead made money.

The two minute chart shows some additional details. Here again we see Friday and today. Again this morning we saw a new high in the leading positive divergence-our entity accumulating more and cutting the average cost per share down significantly. From about 11:30 until about 1:45 we see the tell-tale flat trading range and 3C accumulation right before USO takes off in to afternoon trade and closes nearly unchanged!

USO is a NYSE traded issue which means the open is different then NASDAQ stocks. NASDAQ has a market maker, NYSE has specialists. A market maker facilitates trades going across an electronic network where the best bid/ask are what determines the open and the market on the NASDAQ opens at 9:30. Not the same for the NYSE. On the NYSE, the specialist determines the opening price based on their judgement of supply and demand, not based on the best bid/ask, therefore, and this is an old day-trader trick, when the market gaps against a specialist, they will often open the stock at or below what they believe the low that supply and demand would create, in this way they can fade the open, accumulate shares and go long. As a matter of fact, a NYSE specialist doesn't have to open their market at 9:30, I once traded SKF and had a huge profit in the stock on the open as financials sank, however, it took nearly 45 minute for the specialist to open SKF for trading and by that time most of my gains were gone. This is one reason some professional traders REFUSE to trade NYSE listed stocks.