What is Capping ?

I tried to explain this term to my husband the other day. He's an engineer, with no finance background but has a mind of the sharpest sabre. I guess I didn't explain it well enough for him, as he thought what I said was a bit confusing (to say the least :)..)

So I decided to look up again about capping, as in some stock forum I read this term in nearly daily basis. Many posters on the stock forum said that the 'Capper' is at work when a share price is not performing as well as people would like, or failed to pass a certain price.

Here's what I can find more from my reading:

What is Capping?

According to one financial dictionary :

Capping:

1. The practice of selling large amounts of a commodity or security close to the options expiry date in order to prevent a rise in market price.
2. An attempt to keep a stock's price low or move its price lower by putting selling pressure on it.

Most of share traders or investors have perceived that definition number 2 was in play at one time or another, where a rather large amount of shares are put up for sale, just above the trading range, forcing impatient sellers to go beneath that price.

The capper, it is thought, then picks up those shares because his intent was never to sell the amount of shares up higher, merely to obtain more shares cheaper. Sometimes this is not the case, however, and a seller simply wants out and puts perhaps their entire holding up for sale at the one time.

The true test of a capper often comes about when his capping shares are threatened with being 'taken out' (i.e. someone thinks they are good value to buy). He then removes the shares - indicating there was probably never a serious intent to sell those shares in the first place. In other instances, we have observed that the capper is outsmarted and his shares are in fact purchased by someone else - usually a large buy order in one hit.

How to identify a capping?

Simply look at the market depth, the amount of sellers in the list and the obvious signs of 1 or 2 major sellers that have extraordinary sized share parcels sitting there. Also look at the price points above the perceived "capper" and see if there are any more large parcels on offer by a single seller. Then look for on the buy side to spot any "proppers" that are there to hold the trading gap in share price forcing the buyers and the sellers to exactly the same price level.

Can they work for us?

Capping can work to our advantage, if we wish to obtain more shares. By forcing impatient sellers to move to a lower price, we can, in fact, enjoy the benefit of the capper's work and sit in the queue waiting to collect those shares.

Cappers can also give us the insight to the favoured purchase price of the stock for accumulation (assuming the capper is real). When the capper have had their fill they will disappear, but again, they have a lot more patience than we do. If the share price is being held and the volume is increasing then in might be a buy. This is because the cappers may be able to contain the price but it will be impossible for them to hide the volume. Sentiment indicates that rising volume and accumulation with a stagnant or held share price is the perfect time to buy.

Parts of this article is a courtesy of tangrams and kse3137 of hotcopper