Supply and Demand question

[Tides_are_Turning]

Dr. Alexander Elder believes the idea that supply and demand leads to price increases or decreases in a stock is false. He believes that in order for a share to be sold there has to be a buyer willing to pay that price. A share cannot be purchased unless there is a share to be sold. Each tick is the coming together of a buyer and a seller.

My question is this - With this mentality how is it possible that a stock becomes overbought or oversold?

[Svenwulf]

a start from investopedia:

In investing classes, a very simple question is often asked: what makes a stock (http://www.investopedia.com/articles/trading/121701.asp#) go up or down? The interesting thing is that more than 85% of people don't quite know the answer and believe that buyers make a stock go up, sellers make it go down.

On the surface, that answer sounds pretty logical. A big sell-off (http://www.investopedia.com/terms/s/sell-off.asp) surely makes a stock plunge, and a heavy buying spree makes it go up, right?

The problem is, that's only what seems to happen according to the evening news. This overgeneralization of the influences on stock price is adequate for an investor, but to be a trader, you need to understand much more about the small real-time (http://www.investopedia.com/articles/trading/121701.asp#) movement process underlying the bigger day's results. At that level, a lot more is going on. For starters, did you ever stop to think that during a big sell off, there has to be just as many buyers as there are sellers? That's right: every transaction requires both.

This is where the bid-ask spread (http://www.investopedia.com/terms/b/bid-askspread.asp) comes in, and while this concept may be a yawner for an investor, for a trader it is crucial information.

Bid-ask is all about supply (http://www.investopedia.com/terms/s/supply.asp) and demand (http://www.investopedia.com/terms/d/demand.asp) at the trade execution level, matching buyers and sellers and the process of price negotiation in the market. (To learn more about this process, read Understanding Order Execution (http://www.investopedia.com/articles/01/022801.asp).)

An important concept underlying bid-ask is scarcity (http://www.investopedia.com/terms/s/scarcity.asp). Beneath those huge trading volumes ("millions of XYZ shares (http://www.investopedia.com/articles/trading/121701.asp#) changed hands today") is another trading secret: price tier scarcity.

Beneath those trading (http://www.investopedia.com/articles/trading/121701.asp#) volumes is the fact that although a lot of XYZ's shares may be in play and available, only a limited number of shares are available at any given price tier: the one immediately surrounding the extremes shown in the ticker quote.


If 1,000 shares are available at tier A ($20) and you want 2,000, you will, in effect, briefly control a piece of the market when you buy all available at $20 and then eat into the next tier at 20-1/8.

What makes these tiers happen? If a seller has a limit order (http://www.investopedia.com/terms/l/limitorder.asp) at an ask price of 20-1/4 (and thus no lower) and you have a limit order with a bid price of 20 (and thus no higher) spreads are created by the dynamic bid-ask negotiation and information tension between buyers and sellers. (For more on limit orders, see The Basics Of Order Entry (http://www.investopedia.com/articles/basics/03/032103.asp) and What is the difference between a stop and a limit order? (http://www.investopedia.com/ask/answers/04/022704.asp))

A collection of limit orders will then create tiers or blocks of shares available and sought at various levels anchored to the strategy of traders, the last trade price and high/low quotes they are watching.

Limit orders might create these tiers for XYZ:

1,000 shares at 20
2,000 shares at 20-1/8
3,000 shares at 20-1/4

If your limit order bid of 20 (and no higher) matches an ask of 20 (and no lower), you will cause the stock to uptick (http://www.investopedia.com/terms/u/uptick.asp) as soon as your volume requirement exhausts the tier at that level. The supply is used up, demand still exists and trading equilibrium (or stalemate) is broken.

But what about the ticker itself? If there are all those tiers and orders out there, which ones do we see?

If XYZ is NYSE (three digits), the quote might look like:

20-20-1/4 200X50 50,000

$20 is the bid price (http://www.investopedia.com/terms/b/bidprice.asp). Of all the tiers and prices anywhere in the market, $20 at this moment is the highest price a buyer is willing to pay for XYZ. Since this has to be a limit order, the bidder is not willing to pay a dime more than $20.

Of all the selling tiers and orders in the market, at this moment, 20-1/4 is the ask price, or the lowest price a seller is willing to accept for XYZ. This is, in effect, the best offer in the market for XYZ at this moment in time.

Since both are limit orders, must a trade be executed? Absolutely not. These are merely the bait put out there by the pros as a negotiation tool.

Since we only see the extremes (the highest bid and the lowest ask) are we missing something? Yes. We are missing all the orders at prices that are considered "out of the market" - those tiers that are betting on a different valuation of XYZ.

link:
http://www.investopedia.com/articles/trading/121701.asp

ps- everytime i read that, i love the fractional quotes! ole skewl!

[soundlanguage]

.... My question is this - With this mentality how is it possible that a stock becomes overbought or oversold?


The long philosophical answer:

I've come to see the vast majority of Blue Chip level lift & drop movement is mostly artificially initiated. Buying/selling is tied to value yet beyond there's undoubtably irrational logic to over-buying (until it's too high) or selling (driving it down too low). There seems to be two distinct actions propelling the extreme movement though and they do this odd push-pull 'dance', or an endlessly repeating chicken & egg what-is-causing-what situation.

Picture a hundred people on a party ship in a small lake at night. In the day this lake is placid, even boring, yet somehow seems to be the hot spot at night. There's natural energy buzzing, the din of voices and comforting side to side/back and forth movement creating subtle waves. Just like some stocks are favoured for 2 days then instantly dropped in favour of another sector. Quantum chaos theory playing out right in front of your eyes...

While there is constant action of people coming & going, milling about, there is eventually a crest and trough, build up and dissolve of energy. Beyond normal hub-bub are the much loved spikes of excitement, often created either by accident (often from an outside sources) or more often when a few "leaders" or "independant personalities" gather, attempting to hold a conversation far from any crowd. This isolation ironically creates buzz with a few more people eventually piqueing interest of the remaining follower hoard. The mass migrates just to see what's happening, creating new redirection. The overall result isn't intentional but is predictable... just like stocks, they go up, they go down. There's drama in the extreme highs & lows but usually unseen forces initiate pull the new general direction. I'm still trying to figure out what the genesis of the redirection (usually) is concerning the market. Do speculators start the process by quietly buying or selling en mass (like the private personalities do at the party)?

If so it boils down to the age old "Monkey see Monkey do" .... A small crowd usually draws in a larger crowd, it's human nature.

Obvious example: Stand outside an empty coffee shop (or store) with 2 friends, start engaging in lively conversation while generally ignoring any passers by. Have one person go inside to buy a few cups & return to conversing ... notice anyone driving by will more than likely slow down to see what's going on, naturally drawn to the action. Subconciously they'll also be drawn to the shop, although they may have always ignored previously when no one was standing outside. Have 5 or 10 people stand outside then it's a certifiable buzz starter- everyone will say "ooh, what's going on, let's find out".

Scammers (and politicians!) use group-think psychology incredibly effectively pushing crap stocks this way too, they are master manipulators. With the quality stocks it's harder to spot over-the-top aggregious manipulation, but there's enough insider folks that routinely use these human patterns to their advantage, even using reverse psychology going layers deep. It's impossible to outwit them unless you're in the club! Overall it's a sophisticated game with many rules and few players where anything goes to keep the money flowing.

Now, what was your question again?.... :rolleyes: :mrgreen: