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Interpreting Bid vs. Ask

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serfdom   Friday, 04/06/07 11:42:03 PM
Re: None
Post # of 71720 
Interpreting Bid vs. Ask

The bid is the MMs buying shares, and what happens with the spread is very relevant to what will happen to the tick. The width of the spread is a snapshot of MM "confidence" at a given moment.

A tight spread means the MMs are enthusiatic about the stock for the near term. They know it's going higher, so the bid is right below the ask, usually by just a point or two.

Generally speaking, a wide spread suggests the MMs are not confident they can turn a profit by buying and reselling. They post a wide spread, with the bid way below the ask so they are assured of making a little bank.

When the MMs lose confidence, the stock is toast. During a rally, the sell signal is often when the bid is suddenly lowered and the ask is raised as the uptrend weakens. This is their way of saying, "OK, if you REALLY want some shares, they're gonna cost ya!"

Sometimes (rarely!) you will see the bid ABOVE the ask. This is extremely encouraging and generally means they want shares badly for the future because they know they will be able sell them at a huge profit. It can also mean a short cover scenario is underway, and panic and confusion has set in amongst the MMs. They are all on "a different page" and it's every man for himself.

Retail investors like those times.

Good stocks are obvious. Extensive DD is how you convince yourself to buy a bad one.


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