Chapter 6-2 Buying and Shorting Through Large Size
It is very common to find large size on a NYSE stock’s limit book or on an ECN, such as ARCA or NASD. Depending on the daily volume of the stock and the nature in which it trades, a stock can have numerous large order limits at various prices or just one at a specific price. It is that stock that has large size at one specific price that most commonly produces highly profitable setups very similar to those at a figure.
Like the actions that occur when large size is at a figure, large size at a random price can also create a level that divides traders on what will occur next. Some believe the large size will be printed through triggering a breakout, while others feel the large size will hold firm creating an impenetrable level causing a reverse in trend.
Therefore, buying and shorting through large size at random prices is very similar in comparison to buying and shorting through the figure, however one must use a much more discernable filter in order to decipher which size when broken will actually have an impact on the stock price.
The key to deciphering is to compare the stock chart to the stock price in which the large limit order is at. Look for any apparent technical importance, such as a significant level or moving average. If there is a technical correlation with the large limited size, than there is a much higher probability of a successful breakout if/when that size is completely filled.
Below is an example of a stock with a large buy limit order of 20,000 shares at $42.63. It is a large limit order for this stock, because its average daily volume is roughly 2 million shares and there is no other limit orders anywhere near its size visible on the NYSE Limit Book or the ECNs. As a result, this large size at $42.63 has created at major point of interest. (See example below.)
If the large buy order is able to hold, the stock will bounce up and most likely continue its current trend. Those who were short, in an attempt to reverse the trend, will give up as the large size appears too formidable to penetrate. As shorts cover their positions, the stock starts to bounce off its trend line. Moreover, longs now realizing that the trend will hold, begin buying aggressively again causing the stock to bounce back up. (See example below.)
However, if the large size is printed through, then the stock will breakdown and reverse trend. Those long the stock will exit, as the large size which was acting as support is eliminated. Moreover, shorts will aggressively look to enter as the stock reverses its trend. (See example below.)