Active traders know that market makers for NASDAQ stocks like to play mental electronic games. Longer-term investors can save some emotional wear and tear by being aware of the head fake, so when they see it they will not react quite so instinctively and end up feeling duped.

The purpose of the head fake, as in basketball or football, is to make it look like the play is going one way when it is really going the other way. The fact that this goes on electronically is one argument for more casual investors not to being glued to the monitor all day, thus not having to negotiate and sustain the short-term abrupt movements that speed hearts up and clench stomachs into knots. And yet it is considered simply part of the game for traders, and can be exciting when the reversal move is in the direction that they’re looking for.

Sometimes, market makers will scare the hell out of traders and spook investors by taking a fast-moving Internet stock down 10 points or less in a matter of literally two minutes. The idea in doing this is to force what are thought of as the “weaker hands” (or the “scared money”) into selling their shares, out of fear that they will lose whatever profit they may have accumulated. Or, to scare those who are watching a loss mount up tick by tick to bail out so as not to lose even more.

When a serious head fake is taking place, it can come out of nowhere. Things are looking nice and calm and then the stock jumps down violently and keeps moving straight down. No one steps in to buy, each tick is less than the one before it. It’s a free-fall and each tick is costing a lot of people a lot of money.

I watched this occur during a few minutes’ reversal a couple of days ago. Redback Networks, considered one of the “red hots,” had been hovering around 134 or so since the open of the market. Suddenly, it starts sinking. In less than two minutes it is down over 10 points. At this point, finally some buyers come in and 10 minutes later, it had recovered all but two of the 10-point loss. Now, this was in the midst of the greatest surge in technology stocks in December that the market had ever seen, and especially the “red hot” Internet business-to-business and infrastructure stocks. This was a head fake that could scare anyone, no matter how experienced.

What makes this so scary is that by the time you realize what is happening, it is already too late to react. Unless you have direct access execution, you will be too slow to get in a sell order. The stock will have already dropped 10 points before you’ve pulled the trigger. And, ironically, this is one of those times where the limitations of the technology actually benefit the investor. Because by the time you’ve comprehended what’s happening and decided to sell, entered an order, confirmed it, and sent it to your brokerage, the stock has already begun to come back up again. So, the slowness of the execution process may unwittingly give you the time to reconsider as to whether you want to react out of fear. As the stock begins changing direction, the anxiety dies down and the trade can be canceled or voided.

Now, in addition to the jarring head fake, here is what was so amazing about this particular day. Once Redback had recovered, not much was happening to it until about 45 minutes into the close of the market. It was still down for the day, and hadn’t done much when all the other stocks in its universe had been doing well.

What happens? Well, the thing takes off like a rocket, the likes of which I can’t remember ever seeing before in quite the same way. Redback begins climbing straight up with almost no selling for the entire time up to the close of the market. It leaps from 134 up 5,10,20, 30 points to just over 163 and then, just at the close, falls back to 162. All of this is in only 45 minutes! It was the prettiest move up on a real-time tick graph I can remember seeing. If, a few years ago, someone had told me I would end up describing a stock’s movement on a chart as “pretty,” I would have laughed and said they must have me confused with someone else. But this was a sight to behold.

There is, indeed, a certain aesthetic elegance in watching a stock surge straight up on a graph without pause that can be appreciated only by those who indulge in this kind of investment minutiae.

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