Buyer Beware Of Ocean Power Technologies

Crazy moves in stocks happens all the time. On many occasions, there's news that sets an issue in motion and may end in a few minutes, hours or even last a few days.

In the day and age of high-frequency trading and algorithms dictating fair value of an issue instead of rational humans, these sudden moves happen more frequently and often are more exaggerated.

There's no better example of this type of price action taking place this week than in shares of Ocean Power Technologies Inc OPTT. A vast majority of the trading action has been by appointment only in 2016. In other words, there was so little volume, a trader had to get on the phone to hunt for someone to take the side of his/her trade.

In fact, the volume the four preceding days before its 22 million share day on Wednesday was 9434K, 3995K, 1485K and 2912K. Based on its $1.53 close on Tuesday with a whopping 2 million shares outstanding, its market cap stood at just over $3 million.

The Catalyst

What possibly could have been the catalyst to take the issue to $6.79 before falling back to settle at $6.04? Takeover or merger? A big investment from a well-known activist such as Warren Buffett or Carl Icahn?

Nope. It was the announcement that the ocean wave power generation company had entered into its first commercial PB3 PowerBuoy agreement with Japan's Mitsui Engineering and Shipbuilding for a whopping $975,000.

The Move

That provided the impetus for over a quadrupling of its market cap to $13.58 million at its high tick of $6.79. The math simply doesn't add up.

Instead what took place is the issue appeared on scanners across the globe, as it opened appreciably higher on significantly higher volume. That's when the robots took over and began piling into the issue with no true regard for the long-term impact of the news. The buyers in the issue that day weren't looking for a long-term investment for their portfolio, but only to make a quick buck.

This is evidenced by the price action on Thursday and Friday's session. After a slightly lower open on Thursday and no news to fuel another rally, any Johnny Come lately buyer at $6 or above was trapped.

The scenario played itself out in marketplace as the buy robots were nowhere to be found and the issue swooned to $3.94 before rebounding to settle at $4.17 on only 3.8 million shares. The issue breached Thursday's low ($3.94), reaching $3.70. It should be noted the volume in the issue has tapered off considerably and didn't even reach 1 million shares.

Now What?

Of course, the retreat may be a golden opportunity to buy the issue if in fact there will be many other and larger contracts for its PB3 PowerBouy technology.

The only problem is that if more contracts don't come down the pipeline shortly, the issue may drift right back to the price it originated from before the news ($1.53). Another factor to keep in mind is the overhead supply of longs stuck in the issue that may be using the next bit of good news to sell out of a loser as opposed to piling into the hot stock of the day.