Chart Patterns in Motion

The desk I sit on these days reminds me of what the trading desks in the 80’s must have looked like. A large room full of guys, yelling into phones, at each other, at the screens, and a lot of information flow being exchanged. One of the largest edges on this desk is flow information (large buyers & sellers) which usually costs participants a lot of money.

On Friday, QCOM, which happened to be one of my favorite mean reverting stocks had another horrendous day after reporting the quarter. Looking at the chart, it was a perfect trend day down. Around 2:30 pm or so, one of the partners announces ‘QCOM cleanup print, 36MM shares @ 38.50″. Immediately the other traders announce their intentions to buy at 38.50. I’ll take 100, take 50, take 200, etc. These orders are relayed to the sell-side broker, again over IM or the phone. Sure enough, QCOM traded down to 38.50, found support, and rallied into the close.

It’s amazing to see just how these chart patterns are formed, when Technical Analysts describe chart reading as a measure of human psychology, they are right on the money. Large block transactions are still dominantly the domain of discretionary traders. The use of an algo is to chop a large order into small pieces, when ample liquidity is present however, it’s usually not needed. Why chop an order that could take days to fill at unknown prices when the entire order is available at a predetermined price?

Once this price is established, the information is disseminated very quickly, again through the use of IM, phone, even pure chart readers who have no knowledge of the underlying dynamics at play can visually spot support and create and a line in the sand. Now this is not to say that the 38.50 level would continue to hold beyond the day or even intra-day for that matter. But it creates an opportunity where one can create a greater then 1:1 risk reward at better then even odds. In other words, positive expectancy which will translate into profits over time.Net result on this trade was QCOM closed the day at 39.19. Not too shabby on a few million shares….

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~ by largecaptrader on January 31, 2010.

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