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I've already written about the unfolding Afinsa and Escala saga so I won't go into it again. Today, trading was halted in Escala and the company released an announcement saying that they have not been named in any legal proceedings out of Spain and it is business as usual for them.

It's not surprising then that, driven both by the announcement and by short covering, the shares zoomed higher.

I wanted to feature its intraday action because it is a great example of the principles of expansion and contraction in technical analysis. As you can see, after the halt was lifted and the shares started trading again, there was a very wide range up candle (expansion).


But immediately you can see weakness in that wide range candle: the long upper tail. And so the contraction of price began. It lasted for an hour as price was squeezed tighter and tighter (red arrows). Then just before 1 pm, price shot out of the coil and expanded again. This time, even further than previously.

Price expansion and contraction are key concepts. As you're watching price action, try to watch for them and soon you'll find that you're beginning to anticipate them.

Risk is the most important element in trading. By watching for expansion and contraction, we can pinpoint potential entries that allow for risk to be clearly defined.

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As you've probably seen on your filters, Escala (ESCL) has been crashing for the past few consecutive days. The shares gapped down hard on Tuesday and continued to sell off the Spanish authorities raided the offices of Afinsa and shut them down by declaring them insolvent.

The anti-corruption prosecutor has arrested 9 owners/executives of Afinsa. It seems that the Barron's expose from last year didn't even scratch the surface. It now appears that, since 1998, Afinsa had been running one of the biggest ponzi schemes ever right under the noses of the authorities.

The company, through its website and a press release, is denying everything of course. I found this section of their FAQ especially hilarious :

¿Los clientes podrán recuperar su dinero?

El dinero de los clientes de Afinsa está tan seguro hoy como ayer.


Will the clients recover their money?

The money of Afinsa's clients is as safe today as it was yesterday

Before this is over, we're going to have a great epic story - maybe not quite as epic as say, Enron - but already we have such surreal elements as billions of missing funds, confiscated Lambourghinis and Ferrarris, freshly plastered wall in the house of an executive that unsuccessfully tried to hide 10 million Euros, thousands of bilked investors and one red faced regulatory authority that let this spiral out of control.

The story is still coming out but what they think was happening was that Afinsa would buy either normal real stamps or counterfeit stamps and then sell them at an enourmous markup to their investors. Then they would take part of the money and pay the older investors their 10% p.a. promised return. A classic ponzi scheme that required more and more suckers to keep going and finally unravelled under its own weight.

The unwashed masses, meanwhile, are getting mixed messages about their fate. The Bank of Spain and the securities regulatory authority are saying that there will be no restitution since this sort of investment is not covered under the generous government insurance scheme protecting the financial sector in Spain. But, ever mindful of the wrath of voters, Zapatero has pledged to not leave thousands of people helpless.

So it turns out that I was (partly) wrong and the shorts and Barron's were vindicated to a degree they themselves perhaps couldn't begin to imagine. There is no question that with such a huge short position, someone made out like bandits. I checked but unfortunately no shares were available to be borrowed (from IB).

The lesson I take away from this is that a) a situation can be rotten to the core and still float higher based on pure ignorance and b) the Spanish population is astonishingly gullible and ignorant when it comes to any financial matters.


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