A “market-maker shakeout” is a phrase I coined, and it describes a situation that happens often when you’re holding a quality stock that contains a very real and actionable upside trigger. Perhaps it’s an upcoming earnings report, an upcoming news event, or even a very bullish chart formation. Either way, you’re positioned in a stock that has every indication of moving higher in the days ahead.
Often times, this is when a classic market-maker shakeout begins. You see, just like you, the floor traders also recognize that your particular stock has the ability to move higher in the following days. Therefore, these same traders want to buy the stock. But in order to give themselves the best possibly entry price, they begin to push the stock lower. They can do this in a number of ways. For example, if a company doesn’t have any buy orders lined up at a particular time during the trading session, a floor trader can purposely create a spark that begins a down-move. Like a small pebble that kick-starts an avalanche, a floor trader can push this particular stock down by filling a buy order $0.50 (or so) lower than the current value. This down-tick gets quickly picked up by other traders, who also follow suite and push the stock down by filling reduced-priced orders themselves. After all, nobody wants to get stuck holding a stock as it’s dropping in price.
In a matter of minutes, you see the stock quickly drop, which creates a flurry of selling pressure. Before you know it, the stock is down $2.00 or $3.00, and a classic market-maker shakeout is in effect.
Once the floor traders get the sense that they’ve shaken the tree enough (and all of the weak-handed players have sold out), that’s when they’ll come in and buy up the shares for a much cheaper price. Using this technique, they’re able to get positioned in a great stock with a very bullish upside trigger catalyst for $2.00 to $3.00 cheaper than before. When done correctly, this tactic makes millions for floor traders. But more importantly, it pushes everyday investors out of otherwise winning positions. Here at Bottarelli Research, we are tuned into these floor-trader tricks and help you see through these games to profit off the market inefficiencies that they create.
