Whole number phenomenon


Legendary member
Posted from Hummingbird trading webb page

The whole number phenomenon applies to slower moving stocks up to the $80-90 range. Stocks like DELL, ORCL, CSCO, or MSFT often have very thick ask levels at whole numbers. There can be more than 20 different sellers at the whole number price level. Combined they may seek to sell several hundred thousand shares at the whole number. Remember that the average investor is lazy and likes to calculate profits or losses in round numbers, not in fractions. Thus many may pile up at big numbers. I don’t think this will change much even when all stocks will trade in decimals. Many stocks fail to break such a huge price level, especially if a stock has come from several points away and/or market conditions are not supportive. If a stock is able to eat through all this volume, it often tires soon after and stalls at the next big 1/4 level before pulling back. This has led us to the discovery of our 5/16 secret. It was a couple of years back in an ATHM trade where we got shaken out and I began to notice a really interesting pattern that has been confirmed hundreds of times since then. The big number tends to absorb most of the buying pressure on the way up and most of the selling pressure on the way down. Most slower moving stocks will have the biggest price levels at the 1/4, 1/2, 3/4 and whole number price levels. So, when a stock does break such a big number with heavy volume posted at it, it will often stall before or at the next 1/4 price level. So many times did I look at intraday action in the evening and what did I notice? A stock would often have a daily high 1/4 above a big number or a daily low 1/4 below a big number. Coincidence? I don’t think so!

5/16 secret in shorting. This actually works the other way around for long trades as well. So if you are short in DELL at let’s say 29 7/16 and are looking for a good stop loss, it is usually not a good idea to set it at 30 even. You would want to set it above all the selling volume at 30. Ideally you would want to set it above 30 1/4, because even if DELL broke the big 30 level, this level would have likely absorbed most of the buying pressure. So a stop loss at 30 5/16 is generally the best protection against a short-lived move above 30. A stock is more likely to stall if it took fewer attempts to crack the whole number. What about finding the correct entry points for a short sale using the whole number phenomenon and the 5/16 secret? The more aggressive approach would be to step in front of size at the big number and short somewhere from the 11/16 to 15/16 levels. The more conservative approach is to hope that the stock can break the big price level and then stall. This short seller would look for an entry anywhere from 1/16 to 1/4 above the big number.

So short entry @11/16 to 15/16 stop @ 5/16 above
and Long entry ? 1/16 to 5/16 stop @ 11/16 to 15/16

Now let’s take a look at an xample of how to use the whole number phenomenon and the 5/16 secret in a real trade. Our next chart features a rather slow moving semi-conductor stock, HTCH, in Figure 6 on the following page. In the case of HTCH, only the aggressive short seller would have gotten filled on the entry below 20 since it never challenged the big number. Depending on market conditions, buying pressure coming into the stock and normal daily range for the stock in question, we will try to get a feeling when selling pressure overwhelms the buying. Often the conservative short seller may have to chase the stock a few levels down to get filled after he missed the entry above the whole number. But on those occasions when he does get filled above the whole number, he usually gets a nearly perfect entry. Now you may ask what about the short seller who for some reason or another already sold short at 19 and thought it was impossible for HTCH to hit 20 or higher? We all do get poor entries from time to time and then the most important aspect is to find a very good stop loss that doesn’t shake us out, but that also limits our risk exposure. Looking at the previous table (Figure 5), we can see that we have two good stop loss options above the whole number, 20 1/16 and 20 5/16. In this case, neither one of them would have been triggered. But from my experience I tend to prefer to risk losing an extra 1/4 in order to have added insurance of not been shaken out right above the whole number when the buying pressure often slows down anyway.

Our next example shows the power of this strategy even better. QTRN has been suffering for about a year now and can’t seem to get back on track. It only breaks out once every few months, which is then typically followed by a drop right back to where it came from. On 7/17, QTRN shot up quickly early in the day. Its run started at 16 11/16, so it had covered some ground already when it faced the big 20 number. It all happened so fast that we didn’t really have a chance to check the news and find out whether it was moving up due to hype, news, market maker manipulation or something else. But our experience told us to alert our members to a short opportunity in QTRN near 20. Take a look at Figure 7 to see what happened to QTRN at 20. QTRN did not have as much selling volume posted at 20 as HTCH did, probably because it all happened so fast and somewhat unexpectedly. Nevertheless QTRN ran out of steam as it hit 20 1/4 and soon reversed strongly. In the three months since this run, QTRN hasn’t even gotten close to 20 again. In this case both the aggressive and the conservative shorter would have gotten filled in QTRN. However, if you shorted QTRN somewhat lower and used a tight stop loss at 20 1/16, you would have gotten stopped out near the high. The wider stop loss at 20 5/16, utilizing our 5/16 secret, would have made the short sale a profitable trade after all.

Interesting reading

[Edited by ChartMan on 01-02-2001 at 02:56 PM]
Yep look hard enough and any pattern will be found.....