Deciphering the Inscrutable: A Trader’s Guide to Tape Reading

by David Jenyns on September 7, 2007

This study of ‘responses’ to stimulation or outside influences on stocks is one of the most valuable in the tape reader’s education. It is an almost unerring guide to the technical position of the market. Of course, all responses are not so clearly defined.

It is a matter of indifference to the tape reader as to who or what produces these tests, or critical periods. They constantly appear and disappear; he must make his diagnosis and act accordingly. If a stock is being manipulated higher, the movement will seldom be continued unless other stocks follow and support the advance. Barring certain specific developments affecting a stock, the other issues should be watched to see whether large operators are unloading on the strong spots.

Should a stock fail to break on bad news, it means that insiders have anticipated the decline and stand ready to buy.

A member of a trading syndicate once said to me:

“We are going to dissolve tomorrow.”

I asked, “Won’t there be considerable selling by people who don’t want to carry their share of the securities?”

“Oh!” he replied, “We know how everyone stands. Probably 10,000 shares will come on the market from a few members who are obliged to sell, and as a few of us have sold that much short in anticipation, we’ll be there to buy it when the time comes.”

This reminds us that it is well to consider the insider’s probable attitude on a stock.

The tape usually indicates what this is. One of the muckraking magazines once showed that Rock Island preferred had been driven down to 28 one August to the accompaniment of receivership rumors. The writer of the article was unable to prove that these rumors originated with the insiders, for he admitted that the transactions at the time were not fully understood.

Perhaps they were inscrutable to a person inexperienced in tape reading, but we well remember that the indications were all in favor of buying the stock on the break. The transactions were very large — out of all proportion to the capital stock outstanding and the floating supply.

What did this mean to the tape reader? Thousands of shares of stock were traded in per day, after a 10-point decline and a small rally. If the volume of sales represented long stock, someone was there to buy it. If there was manipulation it certainly was not for the purpose of distributing the stock at such a low level. So, by casting out the unlikely factors, a tape reader could have arrived at the correct conclusion.

The market is being put to the test continually by one element about which little has been said: the floor traders. These shrewd fellows are always on the alert to ferret out a weak spot in the market, for they love the short side.

Lack of support, if detected, in an issue, generally leads to a raid that, if the technical situation is weak, spreads to other parts of the floor and produces a reaction or a slump all around. Or, if they find a vulnerable short interest, they are quick to bid up a stock and drive the shorts to cover. With these and other operations going on all the time, the tape reader who is at all expert is seldom at a loss to know on which side his best chances lie.

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