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Will the phone ring\?

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Traders that took last week's profiled bearish play in shares of OSI Systems (NASDAQ:OSIS) $16.75 -5.47% once again find the stock at a key near-term level of support and are looking for a break. Volume remains light and hints that the phones just aren't ringing at the trading desks which will most likely keep a bid firm from market makers here.

At some point, I'd like to see some volume on a daily basis of 500,000 plus, to hint that there is some interest in the stock.

OSI Systems Chart - Daily Interval

Based on the above retracement, I've thought market makers have had a "sell bias" near the $19.00, a "neutral bias" at/near the $15.58 level as they simply provide liquidity to buyers and sellers, while assessing near-term downside at $14.09 where a market maker needs to consider potential selling under bearish circumstances.

As stated before, market makers in NASDAQ stocks MUST PROVIDE LIQUIDITY UNDER ANY MARKET CONDITION. As such, I like using retracement just like a market maker does to assess levels of support and resistance where they provide liquidity to market participants.

Unfortunately for you and I, we can't judge order flow like a market maker is able to. A market maker knows the amount of buy/sell orders he/she receives on a daily basis and gets a much better feel for the stock and pulse of buyer and seller.

However, you and I can put ourselves in the market maker's shoes. Using the point and figure chart, we've calculated the bearish vertical count of $6, and for now, that's a longer-term level of risk that the MARKET is dealing with. Even our retracement from above seems to fit such a price target.

If, and I stress IF, OSIS is going to $6, then a market maker should have a bearish bias toward the stock at $19, rather neutral here at $16.58, and a "buy bias" at $14.09. To sway the market maker to begin lowering his/her bid from $16.58, a bear needs to see some volume come in from sellers, which the market maker would provide liquidity for at the bid.

The only way the market maker provides liquidity at $16.58 without getting sideways in his/her inventory, is if he/she was shorting up near/around $19 (where we've been bearish).

Hang in there, but we still need a break of $16.58 to get a move to our near-term target of $14.09. If volume is light on a move to $14.09, I'd look to lock in some gains. However, if volume picks up on a potential move to $14.09, then look for market makers to take on a "sell bias" at $16.58, and begin assessing further risk to $10.05.

Remember... the act of shorting doesn't drive stock prices lower. It's the act of bull's selling and hitting bids that will drive a stock price lower. The recent 5-session decline in OSIS looks to be market makers slowly stepping off the bid as the stock pulls into retracement support at $16.58. However, if the phone rings at the trading desk and there's a seller at the other end of the line with 100,000 shares, then we should see some volume pick up and get a move lower.

Try using retracement like a market maker would in stocks you're trading on your own. Put yourself in their shoes and use the levels to ascertain risk/reward. Try and get your "levels" to reflect how the stock has been traded as that will give you greater confidence that you're trading the same levels as market makers.

Jeff Bailey
Senior Market Technician
Option Investor

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