It is critically important to know the structure of a device to fully appreciate its function. For instance: If I were to assert to you that in order to be successful an architect has to conform to certain realities of his profession. No reasonable person would argue that point. He needs to know the materials he is working with and the nature of those materials, how they interact with one another, the principles of engineering etc. The market is no different. Whatever tools you use or develop to understand the market and indeed the very questions you ask about the market, depend on an accurate understanding of existing market realities.
In a nutshell, the reality is that there is an individual who is called a Designated Market Maker (DMM) who while at the same time he is allowed to invest for himself, is also given the incredibly sensitive task of setting the price for the stocks that are assigned to him. As a result this individual becomes a merchant who has the extraordinary good fortune to make whatever posture he takes in the market work to his advantage. Anything that has parts has structure that relates each of those parts to one another and the DMM is the hub on the floor of the exchange.
This explains how and why if market activity is viewed as anything other than a manipulation, price action is difficult if not impossible to understand. Everything on the floor of the exchange happens on purpose including "Flash Crashes." It is a well-orchestrated supremely executed merchandising operation surreptitious in nature.
There are many competing hypotheses concerning the stock exchange and it operations but the single most important truth is that it is rising prices that create demand. Unfortunately, many investors believe that demand is the driving force behind rising prices and heavy selling drives prices down. This explains why more often than not, they find themselves on the wrong side of the trade.
In short, the merchandising cycle begins with the Designated Market Maker accumulating stock at lower wholesale price levels. Once he has accumulated enough inventory, his incentive becomes to sell it at a profit. He will then use his control over price to rally the issue.
On the basis of the foregoing, these are my views and observations:
The Trade - I suspect that Colgate-Palmolive (NYSE:CL) is a short at $102.00. I would only establish 1/4 of the position at $102.00 and the remaining 3/4 at $108.00 with a stop out at $110.00. Never post your stop out. It is too easy for the Designated Market Maker to move the price above your stop out, cash you out and move the price right back down again. In addition, once the stop out triggers it becomes a market order and you really become subject to the whims of the Designated Market Maker. I would be looking to cove at $97.00 (possibly much lower) depending on events as they unfold.
I suspect that the Designated Market Maker in this issue has been using an insider institution as a distribution channel to unload some of his inventory. This explains why Colgate Palmolive has advance from approximately $97.50 (where the large blocks indexed on the chart transacted on April 12th - April13th - and April 16th) to over $101.00.
I further believe that the small advance subsequent to the blocks was to incentivize the institution (with a few points) as well as induce the investing public into buying because it is rising prices that create demand. Once the distribution phase is completed, the Designated Market Maker will sell short. He never misses an opportunity to profit anywhere within the merchandising cycle. Once again it will be the small investor who will eventually be the one left without a chair when the music stops and he will concede his position at lower price levels.
The Designated Market Maker is the gate keeper for other exchange insiders and officials in investment banking firms etc., he is obligated to get these insiders into and out of the market. This is why at major tops and bottoms there is typically a period of time which transpires before the move takes place.
And finally and most importantly: this is a short-term trade, not an investment.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CL over the next 72 hours.