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Thinking like market maker pays reward

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On December 7th, we tried to get subscribers in the mindset of a market maker and looked at shares of 3D Systems (NASDAQ:TDSC) as a potential bullish trade above the $11.50 level. Heck, I liked the trade for aggressive bulls and we actually profiled this one in the "High Risk/Reward" section. The past three days have been a juggernaut for the stock as it looks as if we may have been onto something. For a short-term trader, its time to pay yourself or raise your stop. On a thinner traded stock like 3D- Systems, we actually used the "thinness" to sniff out this play. Now we need to be careful when selling. The best time to sell a more thinly traded stock is when the green is flowing and you've got some strength. An investor that likes the underlying business and fundaments can hang in there. Should we truly be at the beginning of an economic upturn, this companies business could be on the mend. A trader in near $11.60 is thinking... "16% in a week? I'll take that."

3D Systems Chart - Daily Interval

Today's action has shares of TDSC breaking above its 200-day MA and downward trend. This break comes on declining volume and hints the stocks move is really based on "lack of selling" on not real commitment. With that said, good time for trader to sell strength, then look for pullback to $12 level for new entry. Pay yourself for the "high risk" you took. Gaines from December 7th profile may well beat the broader market average returns next year.

If you're more of an "investor" in TDSC, then January may bode well for this trade still. Small-caps especially the Russell- 2000 have historically been the best performing market average in January. TDSC is a component of that average and one of the reasons we were looking at TDSC and its chart when profiled. Just trying to stack as many odd in our favor as possible. That volume spike on December 5th was the hint we needed that a market maker might be building some inventory.

What's also interesting is that yesterday's action had the stock giving a "double-top" buy signal at $13 and trading there also had the stock breaking above its bearish resistance. As the column of X increases, the current bullish vertical count now grows to $22.50.

Today's action

Any options expiration day is tough to make any type of meaningful market analysis. Stocks have been stuck near the upper end of today's trading range. I wouldn't be "fooled" into buying a semiconductor stock that has declined 12% in the past two days that is bouncing up 4% today. Shorts are going to be locking in some gains on weakness, but I don't want to see a semiconductor bull get whacked right now.

The bullish percent charts for both the NASDAQ-100 and Semiconductor sector are now starting to show more sign of internal weakening and tell us a more defensive posture should be taken in both of those markets.

Jeff Bailey
Senior Market Technician
Option Investor

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