EDGE TRADER

Thursday, March 02, 2006

COGT

Here comes the covering rally I expected in COGT. I've backed up my positions with stops and will wait to see how high it goes. It was a bit harrowing earlier in the day as it chose to drop first before rallying, but that isn't unusual.

The set up works like this - a stock gaps down on heavy volume. There is no retracement later in the day from its opening range bottom. Translation: the market makers were forced to buy stock yesterday in the face of the sell off. The price was flat yesterday, so the MM's couldn't thin out their inventory at a profit at all. Naturally they'll want to prop this up today so they can sell out of their temporarily heavy long position. On the flip side, the heavy short interest as of 2/15 in the stock turned out to be dead on right. It will be natural for them (them being hedge funds) to buy to cover today to lock in a portion of their profits before seeing where this goes next. There's a lot of mutual fund and institutional money in COGT , so there is the risk that an analyst at one of the big firms (who coincidentally runs a mutual fund that holds the stock or has the institution as a a client) issues an "upgrade" based on valuation, sending the stock higher.

To sum it up, in this not too unusual scenario, hedge funds make money, the market makers make money, savvy traders make money, and the poor buy and hold and mutual fund investors get screwed. Probably not fair, but everyone has a choice, and I choose to be on the side making money.

1 Comments:

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