3M Is A Long - And Then A Short

May.25.12 | About: 3M Company (MMM)

With the exception of a few minor anomalies, 3M (NYSE:MMM) moves in unison with the Dow. As I have said on previous occasions, March 16, 2012 was a very important day in the market. Several Designated Market Makers were establishing important merchandising stances in their issues. A decline was being initiated and that is why we find the market at its current levels.

The following blocks illustrate the importance of March 16th, at least in this issue:

It should come as no surprise that 3M was peaking at the same time the Dow was at its highs. 3M is a very important component used to move the Dow. I cover this topic in my book The Stock Market Insiders Manifesto and the Dow Divisor in my May 8 Seeking Alpha article.

The Divisor is a very important tool used by the Designated Market Makers and it is often overlooked. In fact, most people are unaware of it because they are focused on price. That is why so much of my thesis is based on the structure and function of the market.

The Designated Market Makers use the Dow as a pied piper to move people into and out of the market. It is essential to understand the Divisor and its impact as an accelerator and brake pedal which has become too sensitive to the touch.

That said, I still believe that the Dow will be moving lower overall in the next 5 - 8 weeks based on other observations. Last week, for instance, I saw more big blocks in many issues that were shorted by market heavyweights than I have seen in a long time.

The Block listed above, which transacted on May 18, 2012 at the open (very important that it occurred at the open) at $84.78, gives rise to my expectations that 3M will advance until mid-June, at which point the Designated Market Maker in this issue will sell short. Further, he will most probably supply the demand which is a result from the rising price by shorting the issue.

I believe the decline will commence at or around the $90.00 level. Subsequent to that, there will be nothing but downside to probably $75.00.

Click to enlarge

On the basis of the foregoing these are my views and observations:

The Trade:

I recommend establishing a long position in 3M with an overall view to the downside. Open your position with only 1/4 of whatever capital you intend to commit to 3M at $83.00. Purchase the remaining 3/4 of the position at $77.92 and stop out at $73.24. Do not post your stop out. I have said it before but it is so important that at the risk of being redundant I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price below your stop out and move the price right back up again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash"? I would be looking to exit the trade at an upside target of $89.64. Do not allow this position to exceed 5% of your overall portfolio. I would establishing a short position at $90.00.

This is a trade, not an investment.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MMM over the next 72 hours.