How to Tell the Difference Between Real Stock Buying Vs. Stock Short Covering

Some stock purchases are motivated from investors wanting to make a purchase of the stock; that is, they want to add the stock to their portfolio. Another type of stock buying is called "covering." If an investor believes the price of a stock is going down, theoretically, he can sell it today and make a profit by buying it at a lower price in the future. If the stock doesn't go down, however, the trader has to "cover his shorts." This kind of buying can temporarily affect price movements.

Difficulty:

Moderate

Instructions

1. Review the definition of "covering a short sell". A short sell is an order made on a stock that closes out an existing trade; it is selling shares you do not own. Buying enough shares to repay the loan is referred to as covering.

2. Walk through an example in which a trader sells 100 shares of XYZ stock at a price of $1 per share and the company rises to $10 per share. To cover his position, the trader will buy back the 100 shorted shares at the higher price of $10, taking a loss of $9 per share.

3. Review the Tick indicator available on the NYSE. The Tick represents the number of stocks ticking up minus the number ticking down on the NYSE (New York Stock Exchange). It trades under the symbol $TICK and a value of +-1000 is a sign of a reversal.

4. Walk through a Tick example. If the Tick reads +300, then 300 more stocks on the NYSE are ticking up, then down (bullish). If the Tick reads -300, then 300 more stocks are ticking down than up (bearish).

5. Look for positive, over +500 Tick to be a sign of genuine buying and not just "covering shorts." Weak trading is supported by day traders looking to fade (sell at highs) the market.

References

• Daytradingit.com: NYSE Tick
• Investopedia: Buy to Cover
• Investodpedia: Short Covering