Page 322 - THE MARKET WHISPERER

318 PART 10 - Winning Trades

institutional sellers. Within a short time, buyers run out of steam and only
sellers remain. This is when the stock begins to move “south,” or to drop.
For as long as the price remains above yesterday’s close, institutional
sellers keep selling, which earns them a bonus. The instant the price drops
to yesterday’s close, there is no bonus anymore. The institutional seller
sells until the price drops to $47.27 [1], and at this point stops. This is
when the stock frees up from the institutional traders and begins to rise
again [4]. The outcome: the gap has filled.

Most gaps close by the first hour of trading. It all depends on the quantity
of institutional traders taking advantage of the chance to profit from the
gap, and the competition among themselves as to who will sell first.

We must also remember that at every price level are non-institutional
buyers and sellers. When a stock opens with a gap up at the start of trading,
it does not arouse automatic buy orders. This is because buyers generally
do not lodge automatic buy instructions when a stock is rising and goes
above a certain price, but sellers do set automatic orders. Let us say, for
example, that you bought BAX at the bargain price of $47.27 [1] and set
an automatic sell order in order to realize profit, should the stock reach
$47.61 [2]. Admittedly, you expected to earn your profit by hard work, but
happily you woke up in the morning to a wonderful new reality: with the
opening of trade, you discover the price is $47.61 [2]. What happens to the
automatic order you set before the day’s trade began? It is immediately
hit! In other words, as long as we are above yesterday’s closing price, we
are in the territory of private sellers joining the institutional traders until
the gap closes.

Clearly, all the conditions relating to a gap up apply in reverse to a gap
down, where the stock price opens lower than the previous day’s close.
In the case of a gap down, the price will be pushed up by the activities
of institutional buyers. In this case, the number of buyers who began
purchasing the previous day will discover that the stock price is lower
than it was at yesterday’s close. For them, this spells a bonus! They will
buy until the gap closes, or at least 80% of the time.