Now what?  With the index and several of its key components finishing at or near their highs for the week (and in some cases – 52 week highs), immediate follow through on Sunday night is paramount for this rally to continue.  Now the bears will tell you that this market is overbought, but how many traders have lost a fortune either shorting overbought markets or buying oversold markets?  The market does not know when it is at extreme levels, and it will turn when the herd least expects it.

From a technical perspective, there is very little resistance between Friday’s high (1390.50) and the multi-year high of 1413.25.  However, there are still several large institutional sell orders on the books in many issues, making the climb a bit boring at times.  In order to classify the most recent rally as more than an expansion of the recent trading range, the index needs to clear 1413.25 early in the week and close above it.  A break below 1376 may reinvigorate the bears and send us right back down to 1350.

One issue devoid of large institutional sell orders last week was Apple (NASDAQ:AAPL).  However, that may change this week.  AAPL is now approaching some very important resistance levels.  These levels are of major significance for a few reasons.  First of all, 618 was the high after AAPL released its blowout earnings in April.  619.87 was the high after a 90 point rally in July.  Therefore, if AAPL can clear 620 and hold, 624.70 and 631.33 will serve as only minor resistance points on the way to 644.  On the other hand, if AAPL hovers around 620 with tight ranges for the next few days and does not break out, it may be prudent to move your sell stops to 610 to lock in previous gains.  If you want to give it a bit more room, Thursday’s low (600.25) would be another area of support to focus on.

Enough is enough with this 88 level in Exxon-Mobil (NYSE:XOM).  With multiple attempts this year to crack this major resistance, will the High Frequency Traders surrounding 88, finally succumb to buying pressure?  The close of 87.55 certainly will help, as XOM will only have to travel 45 cents to get there, as opposed to reaching that level late in a trading day after a significant rally.  If XOM can clear 88 expect a few stray sellers at 88.23 (February 23, 2011 high) but then traders are looking at levels not seen since July 2008 for resistance (88.88).  On a pullback, XOM will find minor support at Friday’s low (86.80) and major support at Thursday’s, which is also the six day low (85.50).

Once again, International Business Machines (NYSE:IBM) is trying to break into the 200 handle.  After failing at that level in mid-June and falling to 181.85, IBM is at it again.  If the overall market continues with its recent rally, IBM may test the waters at 200 on Monday.  Expect the first attempt to probably fail as the HFT crowd will be stepping in front of the institutional sellers at 200, so it may take a few intraday attempts to take it out.  If it gap opens into that 200 level, one should use extra caution playing a break out under those circumstances.  After the 200 level, expect minor resistance at the May 17th high (200.79) and more sellers at the double top from May 15th and 16th (201.35-201.47).  At this time, IBM will find minor support at Friday’s low(196.16) and major support at the weekly low (193.02).

After not participating at all in this recent rally, Microsoft (NASDAQ:MSFT) finally joined the party on Friday.  MSFT, which has been in a little more than a 1 point trading range over the previous nine sessions, maintained its big up open and continued north.  Although it was unable to fill the gap from July 20th (30.05 low), it may make another attempt on Monday.  It should be interesting to observe the way MSFT trades in the 30 handle, since it sliced through the entire handle on July 20th after positive earnings and a huge premarket rally.  With that being said, I can only identify the July 20th high (31.05) as  major resistance above 30.05.  MSFT does not move 1 point in a day very often, but from a technical perspective, this is a possible scenario.  Expect minor support at Friday’s low (29.48) and major support at Thursday’s low (28.97).

Can General Electric (NYSE:GE) finally take out the large institutional sellers at 21?  After closing at 20.96 on Friday, GE will have a running start, especially off the open when HFT players are mostly absent (see this video for more information:  HFT liquidity – Not at the open). If GE can clear 21, the next minor resistance point will be the March 1st 2011 high (21.17) or wherever the next 100,000 share sell order in the book is, as will be identified by the HFT bandits.  After that level, GE will be approaching levels it traded at in February of 2011.  One area that really stands out is the six consecutive highs (February 11-February 18) from 21.44-21.65.  On the downside, expect minor support at Friday’s low (20.77) and major support at Thursday’s close (20.52).

How does a trader play Chevron Corporation (NYSE:CVX) at this heightened level?  Very carefully.  Certainly trading it from the short side last week would not have been profitable.  On the other hand, being long it, would have required the utmost patience as it clawed its way through the 110 and 111 handle.  The only point of reference on the upside is the all time high of 112.28.  For the swing traders looking to short this issue, you can either wait for that number, or use it as a stop out level.  Expect institutional sellers to continue to be present from Friday’s high (111.88) up to 112.28.  On the downside, below Friday’s low (110.90), there may be minor support at Thursday’s high (109.93), but no major support until the weekly low of 108.47.

Another new 52 week and multi-year high for AT&T (NYSE:T) reaching 38.28 on Wednesday before closing on Friday at 37.58.  What can you say about an issue that pays a 4.68% dividend and has appreciated 23% this year, except that you wish you had it in your portfolio.  On previous occasions following a large move, T will consolidate for a few days and then make its next move.  At this time, it appears T may bounce between Monday’s low (37.03) and Friday’s high (38.00) for a few days, before making its next move.  With Friday’s close of 37.58 being in the middle of those two levels, it may prudent to wait for the stock to approach the resistance at 38, or the support at 37.03, instead of trying to decipher the mid-range chop.

Johnson&Johhnson (NYSE:JNJ) made a valiant effort to reach its September 25th 2008 high of 69.97, but was thwarted in its attempt at 69.75.  The resting institutional orders at 70 were too much for the HFT crowd to resist, so they have been stepping in front of that area whenever the opportunity arises.   With a close of 69.12 on Friday, JNJ has some work to do on the upside before it makes another attempt at that 70 area.  Expect JNJ to struggle a bit at Friday’s high (69.32) and to labor all the way from 69.75-70.  Under Friday’s low of 68.89, major support can be found at Thursday’s low (68.02).

Wells-Fargo (NYSE:WFC) aided by the Knight algorithm, sprinted to a new 52 week high on Wednesday (34.80) and closed at its highest price (34.34) since May of 2008.  WFC has managed to avoid many of the problems that has plagued otherUSbanks and is one of the few financials that has recouped all of its losses since the financial crisis.  Most likely there will be large institutional sell orders from 34.80-35.08 (November 4, 2008 high).  After that level, WFC will enter the vacuum area from June of 2008, when WFC plummeted from 40 down to 33.  As a result, use all the half and whole numbers in each handle as minor resistance points.  Expect minor support at Friday’s low (33.63) and major support at the weekly low (32.84).

Another issue making multi-year highs is Pfizer (NYSE:PFE).  After releasing better than expected earnings last week, PFE  traded up to 24.49, one cent shy of its December 7th, 2007 high.  Above that level, PFE ran into a host of sellers between 24.50 and 25.00, back in October of 2007.  Perhaps wait for a double or triple top to form, to use as a reference point if you are attempting to short this issue or take profits.  On a pullback, expect minor support at 24 and major support at Thursday’s low (23.63).

In closing, the index and many of its components finished at their highs for the week, while several are at 52 week or multi-year highs.   This is very similar to last week’s scenario, when the index stalled at the Friday highs, then retreated and battled its way back later in the week.  With limited resistance levels above 1390.50 and a close right at that level (1389), traders should focus on that area to determine whether or not the Friday fade was the play, or if new highs are on the horizon.

Joyce’s comments about the NYSE RLP from July 18th:

NYSE’s effort is an “instrument crafted by our friends at 11 Wall Street in an attempt to garner more retail market share,” Thomas M. Joyce, chairman and CEO of Knight, said today on a conference call. “Let the games begin.”

While competition may hurt Knight by shrinking the volume of retail orders it gets, the company’s market-making business at NYSE would offset part of the loss, he said. Knight can “defend our place in the market quite ably,” he added.

It appears that Knight was so eager to defend their place in the market that they rushed trading software into use, without properly working out the kinks.  Algorithmic trading software can be very dangerous and if it is rushed in without proper testing, very bad things can happen as we saw yesterday morning.

The biggest question that still remains is, why was this rogue algorithm allowed to run for 29 minutes straight?  Was Knight in such a hurry to get this software operational, that it forgot to put a kill switch on it?  That is a very scary thought.

Perhaps Draghi is a skilled technician and realized the importance of holding the bottom part of the recent trading range and decided to give the market a spark, while his combatant, Angela Merkel, was beginning her vacation.

Now with the Federal Reserve Bank meeting this week and the threat of another round of monetary easing on the horizon, who wants to be short this market?  No one.  Unless you get a sharp reversal Sunday night in the futures, expect the index to gravitate towards the 52 week and multi year high of 1413.25.  If the market hears what it wants from the Fed, that level may even get taken out.  If the Fed disappoints the market, expect major support at Friday’s low of 1352.75.

Apple (NASDAQ:AAPL) disappointed the street’s and its own lowered expectations for earnings and came out relatively unscathed for such a large miss.  Of course the after-hours junkies beat it down to 565 immediately following the release, but during the more heavily traded day session it was unable to breach 570.  In fact, AAPL put in a double bottom on Wednesday (570) and Thursday (570.36) and with a slight stretch, a triple bottom on Friday (571.59) before being sucked into the buying frenzy on Friday.  Most likely, there will be nothing but air in this issue above Friday’s high of 585.83, and it could run up to the 600 area, filling the gap from the earnings faux pas.  On a pullback, AAPL should find buyers at the double close area from Wednesday and Thursday (575), and long term players should not fret until the major support at 570 is taken out.

Look who is knocking on the door of a new 52 week high, Exxon-Mobil (NYSE:XOM).  After delivering solid earnings, followed by the same from its brethren Chevron Corporation (NYSE:CVX), XOM will surely challenge 87.94 and the institutional sellers at 88 this week.  Keep in mind, this will be XOM’s third attempt since April  to crack this crucial level, so it may take a day or two to achieve it.  Above 88, you may find some stray sellers at 88.23, the high back in February of 2011, but after that level it is wide open until the July 2008 high of 89.63.  Buying a pullback, besides to cover a short scalp, could be tricky since there is no major support to lean on until the double bottom from the Thursday (85.28) and Friday (85.50) lows.

International Business Machines (NYSE:IBM) is humming once again.  After filling the gap from its earnings announcement and making a double bottom on Monday (188.20) and Tuesday (188.56), IBM crept up on Wednesday and exploded on Thursday and Friday with the broad market.  Although it retreated a bit from the high on Friday (197.41) to close at 196.39, IBM is poised to test major resistance at the double top from June 19th (199.99) and June 20th (199.74).  Of course there will be High Frequency Traders swarming in front of the institutional sellers at 200, so wait for a day when IBM gets a running start (previous day’s close at 199.50 or better) to play a break out through that crucial level.  Major support can be found at Friday’s low, which was also Thursday’s close at 193.95.

If you are scouring the Big 10 for a sleeper stock that has yet to fully participate in the recent rally Microsoft (NASDAQ:MSFT) may be your top candidate.  After slipping under major support at 29 earlier in the week, the MSFT bulls did not allow that to happen on Thursday (29.09 low) or Friday (29.18 low).  After a big up open on Friday, MSFT floated down to almost Thursday’s close (29.16) and then took off, easily clearing the minor resistance at 29.50 and closing well above that level at 29.75.  MSFT, which has been all over the map since its recent earnings announcement (28.78-31.05), has rid itself of some naysayers and may easily fill the gap up to 30.05 from June 20th.  After that level, there is not much in the book until you reach the June 20th high of 31.05.  Expect MSFT to be stacked with large bids all the way from 29.25 down to 29.00 if for some reason it decides to retreat.

If MSFT does not attract your interest, how about General Electric (NYSE:GE)? Has the sleeping giant finally awakened?  This issue, which has come nowhere near its 2008 high (38.52), finally has some upside momentum.  With GE still yielding 3.25%, it continues to be an attractive candidate for yield seeking investors.  With such a strong close, it will take early aim at the large institutional sellers at 21 and may take them out.  After that level, there is minor resistance at the March 1st high of 21.17.  Above that level there is no major resistance until the high from late February of 2011 at 21.60.  Expect minor support at Friday’s low (20.56) and major support at Thursday’s low of 20.16.

Chevron Corporation (NYSE:CVX) continues its assault on its all-time high of 112.38 and all time high close of 111.31 back in March.  Once again, stellar earnings which the company alluded to a few weeks back has been the driver.  While trading as low as 104.60 on Tuesday, CVX rallied almost five points to close just off its high for the week (109.50) at 109.26.  Once CVX clears the March 20th high of 109.93, along with the institutional sellers perched at 110 and the HFT contingent that accompanies such institutional sellers, there is very little resistance until the mid-March highs of 111.06 and 111.31.  As in XOM, buying CVX on a pullback will not be an easy task since there is no major support until the double bottom from the Thursday (107.26) and Friday (107.13) lows.

Say hello to the new Treasury-Bill, AT&T (NYSE:T) , still yielding 4.74% even after this huge rally.  After blowing through the 52 week high (36.21) on Thursday, someone had an inkling that there was some good news coming out on Friday, as it continued to march another 84 cents (very unusual for this issue).  And low and behold on Friday night, they increase their buyback plans by another 300 million shares.  Why they would choose to do this increased buyback at this inflated level is beyond me.  I guess they still believe the stock is undervalued at its current level of 37.14.  For those looking to short this issue, be careful, since there is no formidable resistance until the June 2008 high of 39.91.  Expect minor support at Friday’s low (36.44) and major support at Thursday’s low (35.83).

Johnson&Johnson (NYSE:JNJ) closed within 20 cents of its 52 week and multi-year of 69.70.  There are some large institutional sellers at 70, and expect HFT resistance all through the 69.90’s as the HFT players lean on those institutional sellers.   Once it clears that level, there is no major resistance until the September 22nd high of 70.71.  After that level expect a few more sellers at 71 and no major resistance until the September 19th high of 72.69.  On a pullback expect minor support at Friday’s low (68.89) and major support at the weekly low of 67.

One of the few bank stocks at a 52 week and multi-year high is Wells-Fargo (NYSE:WFC).  With Friday’s close (34.19), it is within 40 cents of its 52 week high (34.59), and within one point of its November 2008 high (35.08).  But with all this resistance, it has been slow going on rallies.  However, with a firm close over 34, WFC will not have as far to travel to take out the big offers all the way up to 34.59.  After that level, offers will be stacked at 35, just ahead of the critical level of 35.08.  Expect minor support at Friday’s low (33.85) and major support at the double bottom from Tuesday (32.95) and Wednesday (32.99).

Despite some disappointing news on the trials of their new Alzheimer’s drug, Pfizer (NYSE:PFE) still managed to make a new 52 week high of 23.94, before falling back slightly to close at 23.83.  Next up on the radar is the institutional sellers at 24 and the January 2008 high of 24.24.  Expect some profit taking ahead of the July 31st earnings announcement as investors attempt to cash in on this monster run from the 22 area less than three weeks ago.  In case of disappointing earnings, expect minor support at Friday’s low (23.51) and major support at the double bottom from Tuesday (23.07) and Wednesday (23.10).

Since I started publishing my Weekly Outlook for Seeking Alpha, this is by far my most bullish article.  From a technical perspective, the September S&P 500 Index futures have cleared a critical resistance level (1376) and closed above it (1382.50) by 6 points, which sets the stage for a test of the yearly highs. But if my super rosy, CNBC like bullish scenario is going to come to fruition the index must maintain 1376.  If not, we could simply be looking at a slight extension of the recent trading range that has persisted for the last two months.  With the Fed meeting on Wednesday, and July’s unemployment data due out on Friday, the headline news will continue to be your major market driver.

For further information about HFT liquidity at the open: Spreads Narrower and Deeper than ever before? Guess again.

Check out today’s tape from Visa:

(Note the ticker tape reads from the bottom-up)

Earnings are released on Visa at 16:05:46, and the news algo goes to work.  It reads the news as positive, and sweeps the book (taking out all the liquidity) up to 128.20, including an aggressive purchase of 9,358 shares at 128.00.  9 seconds later the stock starts trading down over two points from that 128.20 high.

If you add up all the purchases above 127.99, it appears that this algo bought more than 16,000 shares near the top.  If that is the case, this algo is down more than $50K, as Visa is currently trading at 124.50 (at the time of publication).  Maybe this algorithm is making money on other earnings sweeps and it can afford to lose $50K here and there, but that is a lot of coin to just throw away.

In any case, take note if you’re trading a stock after an earnings release because there is some big boys pushing the prices around.

Nanex provided detailed analysis of this trading activity here: Nanex BP Analysis

Exploring the Hidden Costs of Price Improvement

Many “marketable” retail orders receive price improvement from OTC market makers and indeed, retail commissions are substantially lower than they were 10 years ago.  Still, I’m not so sure the retail investor is better off.  Hidden costs associated with price improvement and cheap commissions add up quickly and can wipe out any gains.

The question of how the retail investor is faring in today’s marketplace emerged on TabbForum recently when Michael Masone, Legal Counsel – Equities Division at Citigroup, wrote about the Securities and Exchange Commission’s concept “Trade-at” rule, in his article “Trade-at Rule:  A Breadline on Restaurant Row?

In the piece, Masone discusses how the trade-at rule would harm retail investors as fewer of their orders would receive price improvement and the rule would subject retail brokers to paying access fees that are attached to orders displayed on the exchanges.  This could possibly drive commissions higher.  So why would we want to impose such a rule?  He argues that it has never been better to be a retail order, and why would we want to jeopardize that?  To be sure the retail investor is better off, let’s explore these hidden costs in a little more detail.

Many OTC market makers provide price improvement to “marketable” orders that are routed to them.  This price improvement added up to $238 million in 2010 according to Masone.  But this $238 million – a substantial total – was spread out over billions of shares.  When calculated on a per-share basis, the price improvement adds up to only fractions of a cent.  But Masone argues that fractions of a cent is better than no price improvement at all.  I beg to differ.

Many times, OTC market makers will improve the price by only $.0001/share.  In this instance, some simple math shows that an investor buying 100 shares of a $25 stock will receive price improvement of only 1 cent on their $2,500 order.  Instead of paying $2,500, they pay $2,499.99.  But this is quantifiable price improvement, and Masone argues that all these pennies add up.  But at what expense?

The problem is when an OTC market maker is allowed to step in front of a displayed quotation to provide this nominal price improvement, a displayed liquidity providing participant does not receive a fill.  So what if that retail investor decided to place a passive limit order instead of a market order?  Are they still better off?  This is where the problems begin.

Let’s assume an investor places 99 market orders for 100 shares each, and receives that $.0001/share price improvement on 99 separate occasions.  This is a total savings of $0.99 on his 99-100 share orders.  But on the 100th order, the investor decides to place a passive limit order which rests on the exchange.  In this instance the investor’s order is not executed because an OTC market maker stepped in front of their order and provided the $.0001 price improvement to the contra-side marketable order that would have executed against the investor’s passive limit order.  In this case, the retail investor has an unquantifiable loss, the loss of missing the execution.

As a professional trader, I know the loss from lack of execution is partially quantifiable because I could adjust my order and pay the spread when I see the sub-penny trade transact in front of me on the consolidated tape.  If the spread is the minimum price variance (MPV) of $0.01, I have a quantifiable loss of $1.00 on this one single trade, from being forced to pay the spread.

But let’s assume for argument’s sake that this retail investor was savvy and realized that they too needed to pay the spread.  Again, if the spread is the MPV of $0.01, the retail investor has a quantifiable loss of $1.00 on this one single trade.  So to sum up, the investor placed 100 orders, 99 times they received price improvement and one time they placed a passive limit order, missing an execution, and in this one instance they lose the entire gain they made on the other 99 orders that they were price improved on.  So they are still worse off, and that’s assuming the displayed spread is only $0.01!

Unfortunately not all retail investors are that savvy.  I mean can we really expect a retail investor with a regular 9-5 job, to log onto their trading platform, watch the consolidated tape and adjust their passive orders every time an OTC market maker steps in front of them?  That is unrealistic.  So in many cases this loss is unquantifiable as they may never get filled.  What’s worse is the retail investor may never even know that they could have been filled!

So maybe, that $.0001 price improvement does not justify the unquantifiable cost to that retail investor that places passive limit orders and misses the odd execution.  This is what the trade-at rule tries to address.  If the trade-at rule was imposed, there would be a minimum amount of acceptable price improvement for an OTC market maker to internalize an order.  The CFTC-SEC Joint Advisory Committee made a recommendation of $.005.  In this case the savings to the retail investor placing market orders is a bit more substantive.  Is it enough to justify the unquantifiable loss to the displayed liquidity provider from lack of execution? I’m not sure, but it’s better than $.0001, or nothing at all.

But there’s another part to the equation: access fees.  Most passive limit orders resting on an exchange have access fees attached to them.  If a retail broker such as TD Ameritrade was forced to route more of their marketable order flow to these exchanges, they would be forced to pay more access fees, which could drive commissions higher.  That’s why the trade-at rule should only apply to quotations that have no access fees, or inverted maker/taker models.

Several exchanges already offer an inverted structure, including CBSX and Nasdaq’s Boston exchange.  So it would be just a simple matter of applying the trade-at protection to these trading centers.  Some will argue over who will provide liquidity on these exchanges when they have to actually pay to provide?  Three hundred traders in our firm would argue that paying $.0018 to be executed on the bid or offer is better than paying a full cent when you have to pay the spread.

But the underlying question remains: Is a trade-at rule really necessary?  I mean May 6th aside, spreads have never been tighter and liquidity never deeper, right?  This may be true of the most highly traded US securities, typically stocks making up the S&P 500 index. But there are more than 10,000 other listed issues and many of these stocks have large bid-ask spreads.  We would argue that the spreads on many of these issues are actually widening.  Is the fact that internalization rates are higher than 50% on many of these issues a coincidence?  Let’s consider another real life example.

Imagine going to an auction, and being the highest bidder.  The auctioneer says “SOLD”, you go up to claim your item, and the auctioneer informs you, “I’m sorry, but we have the right to match or beat any price, and we chose in this instance to beat your winning $100 bid by one cent.  The seller received an extra penny.”

What do you think would happen in that auction room?  After a few items were auctioned off, everyone would leave.  They would realize the only time they would get the item was when they over-paid, or the auctioneer didn’t want it.  What incentive is there to bid for an item when there is a privileged participant that can beat your price at the moment it’s about to be sold to you.  You don’t even get a chance to beat them back.  If everyone leaves, the auctioneer can now bid whatever they want and they could get some really sweet deals.  But is that really good for the seller?

This is what our equity markets are starting to become.  Nobody is willing to display orders when an OTC market maker can simply match their price or beat it by a few sub-pennies at the moment their order is about to be executed.  As more and more displayed liquidity providers become discouraged from this lack of execution, they place less passive limit orders.  With less passive limit orders we become susceptible to liquidity crises like we had on May 6th.

So perhaps we shouldn’t jump at the conclusion that the trade-at rule would harm the retail investor.   Perhaps the hurdles to impose such a rule aren’t as high as some commenters (with serious conflicts of interest) would like us to believe.  Perhaps we should explore this rule that would give execution priority back to the NBBO, putting it on a first-come, first-served basis.  I always thought auctions worked best when the item went to a participant who actually participated in the auction.  Is that really bad for the retail investor?

Although the index surpassed the July 5th high (1375) on Thursday (1376 high), it was not for very long.  Once again, and to no one’s surprise, worries about European sovereign debt was cited as the culprit for Friday’s decline.

Now the whole word waits for Apple’s (NASDAQ:AAPL) earnings on Tuesday.  Will the company meet or beat lowered expectations for the quarter and lead the market and itself to a new 52 week high?  Or will the street be disappointed and send AAPL and the overall market to the lower end of its recent trading range.

Technically speaking, 1376 is the major level to focus on for a break out to the upside.  On the downside, a breach of Tuesday’s low (1339.25) could signal a move to the July 12th low of 1319.75, then an attempt to crack 1300 again.

After making a recovery high on July 10^th (619.87), which coincided with the previous post earnings euphoria high (618), Apple has been nestled in roughly a 25 point trading range.  It reached the upper boundary of the range on Thursday (615.35) and Friday (614.44) before flopping down and closing near major support at 603.  If that cannot hold, the six day low (600) will be a minor stopping point on the way back to 574.  On a positive earnings report, expect 620 and 625 to provide resistance before the April 11th high of 631.33.

Exxon Mobil (NYSE:XOM) continues to reside within two points of its 52 week high of 87.94.  However, it is consistently finding sellers in the low-mid 86’s as 86.15-86.38, Wednesday, Thursday, and Friday’s highs, are well ahead of the institutional sellers at 87.  Since July 13th, XOM has been confined to just over a two point trading range.  With 84.10 (Tuesday’s low) marking the lower end of the trading range, expect XOM to maintain its upside bias until that level is taken out.  On the upside, expect a slow going on rallies as High Frequency traders step in front of the sizable institutional sellers perched at all of the half and whole numbers up to 88.

After getting a nice pop off its earnings report, International Business Machines (NYSE:IBM) has had no follow through.  In fact, it seems more likely to fill the gap down to 188.59, than taking out Thursday’s high at 196.85 based on Friday’s market action.  For those looking to purchase IBM off Friday’s low (192.17), use a tight stop because there is no major support for IBM until you reach that 188.59 level.  If IBM can somehow muster a rally, expect sizable sellers at all the half and whole numbers up to 195, as short term swing traders are sitting on some nice gains and are trying to lock them in.

What a wild ride for mild-mannered Microsoft (NASDAQ:MSFT).  After skyrocketing in Thursday’s after hours session to 31.50, sellers came out in droves all the way from the open on Friday (31.00) until the close (30.11).  What investors should take note of here is that when a stock that usually trades 50 million shares a day usually in a 50 cent range, moves one point on a few million shares in the extended session, you need to see immediate follow through on the current trend at the 9:30 AM open or you need to get out of the way.  As evidenced by Friday’s steep selloff, MSFT’s after hours run was totally unwarranted.  Now the question is whether or not MSFT can remain in the 30 handle and avoid testing the low of the recent move at 28.54, or mount a more dignified rally to the major resistance at 31.

Speaking of mild-mannered stocks with unusual price action, how about Friday’s activity in General Electric (NYSE:GE).  Once again, the news driven bots pushed GE to 20.12 in the premarket from its 19.80 close based on its positive earnings release.  However, after opening virtually unchanged, GE suddenly dipped to major support at 19.45 before a rip your face off rally up to 20.37.  Unfortunately, the rally could not hold and GE fell, to settle in the same area as its last two closes.  As long as the 19.45 level holds, GE should creep its way into the 20 handle and test the major resistance from Friday’s high (20.37) up to the July 3rd high of 20.50.  If the stock starts to sell off, do not expect a complete collapse under that 19.45 level as there are minor support levels all the way down to the June 6th low of 18.90.

Similar to XOM, Chevron Corporation (NYSE:CVX) is trading within an earshot of its 52 week high of 112.28.  After issuing some upside guidance not too long ago, CVX has put together a string of 5 higher highs, higher lows and higher closes.  Certainly do not stand in front of this freight train until that impressive string has ended, and use 107 as a reference point to exit on weakness.  Expect major sellers at 110 and 111 as CVX attempts to test the all time high at 112.28.

AT&T (NYSE:T) made an attempt to test the 52 week high at 36.21 but fell just shy of it, reaching and closing at 36.19 on Wednesday.  After the lower open on Thursday, T was unable to trade in the elusive 36 handle again and made a new low for the week on Friday (35.10) before recovering to close at 35.29.  As T resumes its tug of war between 35-36, expect sellers to reload again at 36, all the way up to the recent high.  On a break below 35, there will be minor support at the July 13th low of 34.85 and major support at the July 12th low of 34.65.

Has Johnson&Johnson’s (NYSE:JNJ) parabolic move from 61.83-69.70 come to an end?  Based on Friday’s action, in which it opened at the high and closed near the low, a rarity for JNJ since mid-June, I think a top may be in.  With the issue rallying on not so stellar earnings, what could be the driver to push JNJ back to its 52 week high of 69.70?  Perhaps favorable results of a new drug trial could be the impetus for its next leg up, but in view of its recent ascent, investors may be willing to sell on good news instead of buy.  For those looking to secure profits from this gift of a move in JNJ, a sell-stop at 68 would be prudent to avoid a painful pullback to the 65 level.

After making all five highs above 34 this week, with 4 of the 5 highs between 34.25-34.35, Wells Fargo (NYSE:WFC) finally is exhibiting some weakness.  By closing at 33.81, only a nickel off its low of the day, (33.76) and 21 cents above major support (33.60), the stage is set for some profit taking in this issue.  Since earnings have already been announced for WFC, there is very little news than can push WFC higher, except for some “Johnny come lately” upgrades from the street.  Look out below, if WFC breaches 33.60, since there is no major support until the double bottom from July 12th(32.64) and July 13th(32.66).  Expect sellers to reload again in the 34.30 area all the way up to the 52 week high of 34.59.

A new comer to the Big 10 is Pfizer (NYSE:PFE).  With basically a straight up move from its July 11^th low of 22, up to Friday’s high of 23.87, PFE’s string of seven consecutive higher high’s and nearly 7 consecutive higher low’s should be snapped this week.  A breach of the double bottom from Wednesday (23.48) and Thursday (23.46) may trigger a sharp decline back to the 23 level.  Expect monster sellers at the double top from Thursday (23.83) and Friday (23.87) all the way up to the institutional size residing at 24.

As we reach the mid-point of earnings season, the index and its major components are sending mixed signals.  While some issues are within striking distance of, or making new 52 week highs such as PFE, other issues had earnings reports which were initially well received, but the stocks had little or no follow through in the following days.  With the “Big Dog” of the litter announcing on Tuesday (AAPL), investors that are satisfied with their hard fought gains since 2009, may want to take some chips off the table.  If there is one issue that a disappointing earnings release could wreak havoc on the entire market, it is AAPL.  For those willing to ride the storm out, if a positive earnings release from AAPL does not propel the index above 1376, it is time to head for the hills.

Here is the chart:

It is safe to say that whatever institution sent those orders, they were probably done in error, as the institution lost a significant amount of money in this one minute time period.  However, the more concerning issue to me is how this order was handled.  It is apparent that this order was handled by an OTC market maker, because the back part of the order was executed off-exchange.

Here is the trade executions from the original sell-order:

As you can see the stock quickly fell from a price of 44.54 to 43.10 as a result of the institutional 14K share sell order.  But take note of the last few executions.  There are four separate trades executed off-exchange and reported to the FINRA trade reporting facility (designated FINRA TRF on the tape).  The four trades I wanted to highlight are:

Time                Price         Size       Market Center

10:06:29          43.10          200      FINRA TRF

10:06:29          43.101      2104      FINRA TRF

10:06:29          43.101        700      FINRA TRF

10:06:29          43.10        1600      FINRA TRF

These trades were executed by an OTC market maker, as they were printed off-exchange.  The total number of shares purchased by the OTC market maker here is 4604 shares.

Now take a look at the sequence of trades from the institution’s 14K share buy order:

Again, if you look at the last part of the tape, there are two executions at 10:07:33 reported to the FINRA TRF.

Time                Price          Size        Market Center

10:07:33          44.959         829        FINRA TRF

10:07:36          44.96         4200        FINRA TRF

The total number of shares sold by the OTC market maker is 5029 shares.  Assuming they may have had 425 shares on their books from earlier (because the buy order and sell order doesn’t perfectly match up), the OTC market maker just made a cool $8500 for their handling of these two orders.  The OTC market maker makes this money by playing a game where they allow the initial part of the order to move the price, and then take the back part of the order for themselves.

Here is the way the game was played.  (Again, this is all just derived from the tape, so there is no actual proof that this occurred in this situation, but knowing how OTC market makers operate, the example from yesterday is pretty straight forward).

The OTC market maker received the institutional order to sell 14K shares from some retail brokerage (they actually buy this order flow from the brokerage house – called payment for order flow).

They then allow the first 10K shares to sweep the book lower (trade out the limit buy orders on the book), and move the price of the stock to where they would like to be a buyer.  They then execute the back part of the order (the last 4604 shares) for themselves, purchasing the stock at the lowest price.

They then received a subsequent buy order from the institution for 14,000 shares.  They lick their chops, and allow the first part of the buy order to move the price higher, and then sell their own stock (that they just purchased a minute earlier) at the highest price, selling 5029 shares.

Their toll for providing this service to the market (not counting the extra 625 shares that were sold at the top) was $8563 (4604 shares x $1.86).

This money comes directly from the institution that sent the buy and subsequent sell orders. Now you might say the institution deserves to lose that money for sending such stupid orders.  That may be true, but why shouldn’t the back part of that order be allowed to naturally interact with the other limit orders on the order book?

There was a market participant bidding for 1900 shares at $43.10 prior to the institutional sell order being entered into the market.  Of those 1900 shares, it appears that participant got filled on zero.  This is because the OTC market maker chose to step in front of that person’s limit order and take the remaining 4604 shares for themselves.  The OTC market maker executed the back part of the order at the expense of the limit order trader, and left that trader unfilled.

Now it should be noted that the OTC market maker did nothing illegal here.  This execution tactic is perfectly within the rules defined by the SEC, as OTC market makers are allowed to purchase order flow and trade against it.  But why do we need a middleman pocketing $8563, by stepping in between a natural buyer and a natural seller?  Secondly, what point is there to providing liquidity when there is a privileged participant capable of stepping in front of your order at the moment it is about to be executed?

This practice discourages displayed liquidity providers.  If we started eliminating some of these predatory practices, our markets would have much more liquidity. If we had more liquidity on the books for issues like this, the institutional orders wouldn’t have nearly as much price impact.  Perhaps then, these types of institutional errors wouldn’t prove to be so costly.