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Why Supply And Demand Inflections Are Different

|Includes:Axion Power International, Inc. (AXPW)

For several months I've been writing about supply and demand inflection points like the one that started last week in Axion Power International (NASDAQ:AXPW). While many Seeking Alpha readers are familiar with the technical behavior of news driven price spikes, there are very few students of supply and demand inflections because they're rare. I'm intimately familiar with supply and demand market dynamics because my work over the years has included several reverse merger transactions and that's where supply and demand inflections occur most often.

Since this is an important topic, I went to extreme lengths and bought historical trading data for Boots & Coots International Well Control, a reverse merger that I worked on in the summer of 1997 and know intimately. Boots & Coots was a textbook example of how supply and demand inflections develop. The nice thing about the Boots & Coots transaction is that it had four clear supply and demand inflections between August 1, 1997 and December 31, 1998. Here's the 19 month high, low, close price chart.

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The first supply and demand inflection began in mid-September when the market had absorbed two-thirds of the free trading shares held by former shareholders of the public shell. The inflection ended on November 1st when restricted shares held by former officers and directors of the shell became free trading. Here's the two month chart.

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The second supply and demand inflection began in January 1998 when the market had absorbed about two-thirds of the shares held by former officers and directors of the shell. It was a sharper spike that was quickly alleviated when the company eased resale restrictions on shares that had been issued to consultants and others in connection with the reverse merger. Here's the chart.

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The third supply and demand inflection started in April 1998 when the market had absorbed about two-thirds of the consulting shares and the price reached a level where the early open market buyers started taking profits. Here's the chart.

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The fourth supply and demand inflection started in August 1998 when shares held by pre-merger investors in the firefighting company became eligible for resale and the company reported disappointing Q-2 earnings. Here's the chart.

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The important takeaway from these charts is that supply and demand inflections take longer to develop than news driven price spikes and traditional technical analysis of resistance and support levels won't typically give you an accurate view of what's driving the price.

Stocks: AXPW