Evolution of the Supply Tool

The Supply tool calculates the probability that a given shareholder will sell his shares at some point. This probability depends on the current price and on the price at the time of purchase. This means that the probability is a matter of the profit/loss "carried" by each share at a given time.

For example, if a trader experiences a 30% gain, he might start booking some of his gains. On the other hand, a trader who experiences a 10% loss will be more eager to cut his losses than a trader who experiences a 3% loss.

A very strong leading stock could experience a very high supply level, because most shareholders carry strong gains. In such a case, the high level of possible supply does not tell us that the price will fall: partial position selling could push the price in a small pull-back, but such a pull-back will attract new investors. This means that shorting stocks that have a strong supply level due to a strong uptrend is usually a bad idea.

On the other hand, when the majority of shareholders start losing money, then the eagerness to sell increases, because cutting losses is always a fund's priority. A fund manager will be getting in trouble if he starts holding many losing positions, but he will be praised if he holds winning positions, even if the price went down 30% from the high - if at least he is holding a gain compared to his purchasing price.

It is therefore important to separate the "Profit Taking" selling activity from the "Loss Cutting" Selling activity

Below are two Supply Figures for GRPN: the traditional Supply "U" shaped curve and a new Figure that separates the two types of selling activities. Note that the global Supply curve is the sum of the two separate curves.

We are currently testing this feature and intend to make it available today or tomorrow.
This feature makes it easier for short-sellers to target the best stocks to short: short trades will work better when you are above 10% in the red side of the Figure. This is the case for GRPN, but not for AAPL.


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