IF I MAY SAY THIS:
I have been trading stocks, mostly pennies, for 15 years. There are a lot of what I call MYTHS out there as it relates to shorting and in particular the shorting of penny stocks. What I am about to relate to you is not my opinion, but the reality of the situation, so please consider this not just for DRIO, but going forward on other penny stocks.
A MM, (market maker), is tasked with attempting to foster a balanced market for securities so as to keep things running in an orderly manner, based upon supply and demand. Their primary mission is to make money by getting a share of the brokerage commissions, and the differential between the BID/ASK. Now imagine, if every time say Ameritrade, Fidelity, Etrade, etc.. were told by NITE, sorry, we have no shares to sell, how long before they have no business? Would you go to grocery store everyday, day after day, being told, sorry, we have no food to sell you here? No, you would not, you would find another grocery store to buy food. Whenever a market maker sells a security for which they do not have inventory for, they are considered TECHNICALLY SHORT that equity. (example: NITE has 100,000 shares of DRIO in his inventory. All of a sudden they are deluged with multiple buy orders, exceeding that inventory. Now some of you are saying, then based upon simple supply and demand, the stock should explode. Those huge gyrations would inevitably cost a lot of people a lot of money, as the stock would run 10,000%. Also inevitably, those traders that bought at say .90 cents, would watch the stock sink just as quickly, and chaos would ensue.) Thus, they have not done their job, as some would profit but most would be bag holders. So they contact their other MM buddies and say, hey can you cover me, sometimes they say yes, sometimes they say no. Regardless, NITE does not want to turn away business, so they go ahead and sell all the shares they want, many times not having the inventory to be selling so many shares. So many of those short selling reports so many people refer to day after day, thinking there is such a large short position, are simply not realizing that this is what is happening. In my example, yes NITE is technically short, but not for the reasons many believe.
This is when you have what is commonly referred to as NAKED shorting, due to the fact that they sold more shares that day, then they have to sell.
Now that we have established that premise, lets examine, DRIO's trading since yesterday. The market makers cannot possibly be familiar with every penny stock out there, to believe otherwise is delusional. So NITE all of a sudden gets hit with a flurry of buys on DRIO yesterday, and not wanting to miss out on the business, sells shares he does not have. At a certain point they realize that the stock is getting away from them, so they become uncomfortable selling so low, thus the price goes up. The methodology works, because they are confident that it cannot rise every single day, and know that they will be able to balance out the trades in the next session or two. They also mitigate their exposure by only selling to retail traders on the ASK, but they are buying at the BID. This is called straddling the spread. Problem is, a lot of market makers continued to sell shares of companies, with absolutely no intention of ever balancing their books. They just kept selling and selling, an endless supply. This was abusive and the SEC decided to try and close the loophole in the market maker exception rule, of maintaining an orderly market.
So approximately 5 years ago, the SEC implemented what is known as REG-SHO. This rule, was all the rage on the penny boards, because many people knew that the MM's were playing dirty, and believed that finally the guilty brokerage firms would have to play fair. In a nut shell, REG-SHO stated that market makers could, again in order to maintain orderly markets, continue to sell shares they did not have, BUT, they have to cover them within 3 trading sessions, no more reckless shorting. If the MM's did not cover the shares sold, relative to their inventory, a FTD, (failure to deliver) report was issued, showing the amount of shares, which after 3 trading sessions had not yet been located by the brokerage firm, to ostensibly cover the shares they naked shorted. The problem here, is that the rule is not strictly enforced, and time has taught me, that whatever rule gets implemented, the Wall Street people have already found a loop hole around it. ( side note, whenever the SEC proposes a new rule or regulation, it is put out to all of the brokerage firms, for comment and as a heads up that they need to modify their way of doing business going forward. Normally the brokerage firms have at least 90-120 days warning).
One of the ways the brokerage firms can avoid the FTD, is to block trade amongst themselves, thus restarting the clock all over again. This is best analogized by the crooked casino mantra, having cards up their sleeves, using loaded dice at the craps table or a magnet on the roulette wheel, to manipulate the landing spot of the ball.
The people who short penny stocks are comprised of your toxic diluters, usually done via off shore accounts in the Bahamas or Belize. Since we are at least 3 weeks out from the the specter of additional dilution, I do not consider that scenario currently at work here.
How can the brokerage firms get burned? A buyout of the security negates their respective ability to square the books. What makes their job easier? Dilution of the stock.
How is this relevant to DRIO?
Looking at the trades today, you had, in my humble opinion, 3 different things happening contemporaneously:
1) At the open, the MM's utilized the old GAP and TRAP. Meaning they gapped the stock up, sold shares and then counted on profit takers to begin to cash in, thus they gained the ability to start taking it down.
2) Predicated on the preceding, they induced a little fear, as people are reticent to give back gains, so they began taking profits.
3) Based upon points 1 and 2, they took that fear and created a little panic, which really gets people bid whacking, which helps the MM's balance the books.
This process is repeated day after day, on numerous stocks, Seems kind of unfair right?
You need to understand this when trading in penny stocks. Recognition of this ebb and flow will make you a better trader, help clarify what is happening, and ultimately help you succeed in trying to understand why every stock does not immediately run to $1.00.
WE KNOW that DRIO cannot possibly dilute until, at the earliest September 22nd. This means that the company wants nothing more than to see this equity rise as high as possible, because IF they have to dilute, they would, for obvious reasons, want the share price as high as possible, so that they do not have to issue so many shares. Looking at the tale of the tape from today's trading, one can clearly see that this volume was all retail.
DRIO has everything going for it, and the #1 enemy of all penny traders is dilution, which as previously discussed is not happening, and cannot happen until at least September 22nd.
Technically: we are sitting right on the support line at .104, with rock solid support at .093. When looking at DRIO during tomorrow's trading session, know your support lines, the trend lines and always stay disciplined.
I hope the preceding post was helpful to some of you.
Happy trading,
SPORTYNORTY
