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Tide watchers is what I call those who attempt to buy and sell in the direction of the intraday ebbs and surges of price trends. This group is relatively unconcerned with the state of the economy, the price-earnings ratio or eamings growth of a given stock, or any other underlying market fundamentals. Rather, their focus is almost entirely on the direction of price movements from moment to moment and day today. The market moves up or down or sideways, and their goal is to be buyers or sellers or flat (no money in the market) accordingly. /

Tide watchers are the locals in the pits of the futures exchanges, the market makers, and the floor traders on any of the major exchanges. They fit into the category of technicians because their sole interest is in the price trend-"The trend is your friend" is the essence of their thinking. Typically, in lieu of any significant news, they try to ride the trend while watching "resistance" and "su pport" points (see Figure 6.1)-previous highs or lows that make other tidal-type participants wary.

In an uptrend, a previous high point above the current price level is resistance; whereas a previous low is support. In a downtrend, a previous low point be low the current price is resistance, whereas a previous high is support. In an uptrend, if a previous high is broken and prices continue to climb, then the tide watchers are buyers, and any significant succession of down ticks (a tick is the smallest

5 Minute Bar Chart








TQ 20/20 G" 1991 CQG Inc. Figure 6.1 December 1989 S&P Futures - intraday resistance and support levels.

1. Previous days close is support if the market opens higher, and resistance if it opens lower.

2. In lieu of any other reference point, 00 ("evens") serve as resistance or support. In this case, support.

3.Prices test support of previous days close. 4."Evens" become resistance.

5.Prices test "evens" support, plus previous days support lei. 6.Prices test resistance established at point 4.

7. Market "gaps" open on positive news regarding leading economic indicators. 8.1nitial high near opening becomes resistance.

9. Prices test resistance and then break out on high activity to new highs for the day. possible price change in any market; V8 for stocks, yle for options, and so on) is a possible sell signal. If a previous high is broken and prices fail to move further upward, they are sellers, and any significant upward movement is a possible buy signal. Converse reasoning applies to significant low points. Tide watchers always try to be attuned to what the everpresent "They" are thinking and what "They" will do next, and their method of measurement is the character of changing price movements. 2

Since tide watchers make up the bulk of the floor traders on the exchanges, it is in the best interest of the speculator and investor to be aware of their potential impact on the short term price trend. They can easily drive the price of a particular stock or commodity up or down several points in the short term, with nothing but their own interactions creating the movement.

For example, suppose that floor traders on a stock exchange observe that offerings for XYZ are light and that declining prices dont result in any significant liquidation. If this pattem continues, they might conclude quite reasonably that there is very little interest to sell XYZ. The logical thing for them to do is pick up the stock at any sign of weakness -to buy the stock at what they perceive as short-term bargain prices-and test the market.

Suppose that XYZ is 401/4 bid, offered at 40N.3 For simplicity, assume that only 500 shares of the stock are offered at N. The floor traders can only guess how much is available at Y2, %, and so on; but thinking that long interest is strong, some shrewd fellow on the floor decides to test the market by buying the stock and waiting to see what the change, if any, in buying and selling interest will be. In particular, he watches to see if any outside orders come in as a result of the price change, and if so, whether they are buy or sell orders.

If sell orders come in, then the trader rids himself of the stock and tries again another day. But if a few buy orders come in and are filled at perhaps 2 a nd %. then a few more brokers join in. If the process continues, then very quickly a short-term bullish atmosphere is created for the stock.

Up to this point, the floor trader has no idea whether or not there was any change in the eamings prospects for XYZ company, although it is likely that there is some reason for the initial lack of interest to sell. But regardless of the companys prospects, if the movement gains a large enough following on the floor, a miniboom in the price of the stock can occur. After all, the bullish floor traders involved all have an interest in the price going up.

On the other hand, large sell orders coming from outside can, at any point, squelch the rally. And like any pyramid scheme, to the extent that the mini-boom is purely speculative, those participants at the top stand to lose the most. Similarreasoning can be applied to a mini-bust, which quite commonly occurs shortly after the mini-boom. Program trading can initiate, accelerate, and/or amplify the whole process.

Speculators or investors who are aware of the effects of tide watcher-type activity can use their knowledge in several ways. First, practiced "upstairs" observers can recognize this kind of activity on their monitors and optimize profits by careful timing of their intermediate-tem and long-term buys and sells within the intraday cycle. Second, the "legitimacy" of price changes, in terms of their intermediate-term and long-term staying power, can be gauged according to the relationship of the price move to market fundamentals and the movement of the markets considered as a whole. And finally, the character of tide watchers activity can be a key indicator of the consensus of opinion on the Street.

This last point is probably the most important for the speculator. Lik e geologists who attempt to predict volcanic activity or earthquakes by monitoring seismic

activity, speculators can gauge the tremors of coming market events by monitoring intraday and day to day activity. Specifically, volume numbers, the ratio of advancing issues to declining issues, the short-term response to important economic or market news, and the rate of change of prices all can contribute to an estimate of the predominant driving psychology of market participants.

In the case of the October 13,1989, sell-off in the stock market, the news that financing fell through on the United Airlines takeover sent the market into a selling panic. This was a clear indication that the tenor of the market was wary. Market opinion was clearly skeptical about the strength of the ongoing bull market-one more sign to indicate that a bear, or at least a secondary correction, might be near at hand.


Manipulation is a dirty word on Wall Street. It carries a connotation of the kind of unfairness and dishonesty generally associated with a fixed horse race or dealing from the bottom of the deck in a card game. But in fact, it is an entirely different thing. According to the Random House Dictionary (1969 College Edition), to manipulate is to "manage or influence by artful skill." Websters 1972 Collegiate Edition adds as a secondary meaning "to control or play upon by artful, unfair, or insidious means." But there is nothing manifestly "insidious" or "unfair" about attempting to profit by managing ones own buying and selling activity in an attempt to cause a change in a price and profit by the move -that is, unless the SEC (Securities and Exchange Commission) thinks there is. Then it becomes insidious because you can go to jail for it. Individuals go to jail, but institutions dont.

The large institutional houses use huge buy and sell programs to Manipulate market prices in the short term. Their objective is to profit by playing the disparities in prices between related markets, disparities often induced or exaggerated by their own activity. They rely on the psychology of the tide watchers for their success.

Suppose for example that a $2 billion pension fund decides to liquidate $100 million of its stock portfolio. Knowing that the sale of such large blocks of stocks will probably send the market indexes lower, it decides to take advantage of the fact. During a typically quiet period, usually around 2 PM., it begins to sell S&P Index futures to consolidate a $200 million short position. This is double the amount of the cash stock position and would take somewhere in the neighborhood of 1,000 to 1,500 contracts to attain-a number easily accommodated by the S&P futures market.

Then, at about 3:10 PM., the institution begins scale selling of stocks to the tune of about $10 million worth of stocks every five minutes or so, finishing off with one large block sale at the close. Because of the huge amounts of money and stock traded, short interest is generated on floor of the stock exchange, and prices begin moving down. In response, the price of the futures moves down proportionally. Tide watchers ride the crest and accelerate the move in both the cash and the futures markets into a mini-bust.

The institution, while losing a little money by selling stocks on the way down, is more than compensated by the gain made in buying back a successful (and double-sized) short position in futures on the way down. Bear in mind that the margin requirement for the futures is 5%, whereas the margin requirement for stocks is 50%; so using leverage, the upside profit potential i s 10 times greater in the futures market.

The next morning, the tide reverses, and buying interest builds, creating a mini-boom. By knowing in advance-with practical certainty-the results of its massive involvement, the institution is able to time its buys and sells and make a handsome profit for itself and for its clients in both markets and in both directions, plus generate some nice commission or fee business. In the end, the market is effectively unchanged, but a lot of money has changed hands. There ar e many different types of programs, some of them incredibly complex, and not all of them are manipulative. But all in all, its a nice racket.

For the sake of justice, it should be noted that any "unfairness" inherent in program trading is due not to the practice itself, but to the governments arbitrary regulation of the markets. If "manipulation" is condemned when practiced by an individual, but tolerated if done on a camouflaged but massive

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