The classic move would be to position for a decline while giving the impression to the investing public that "Hey, the water's fine, come on in".
They would do this by shorting the lower priced DJIA components while maintaining the higher priced stock, or even taking those up a bit.
When the trap was sprung, those higher priced stocks would be collapsed, triggering stop loss limit orders to feed the fear, and nary a specialist bid in sight. As the ticker spread the story to the country, the sell orders would come pouring in and accelerate the down move. Then the margin calls would go out, literally stripping stock from the accounts of the unwary.
This history came back to me as I watched IBM today. Big Blue is the highest priced stock in the DJIA. It was down $1.67 to $85.81. The current divisor is 0.1255527090 which means a $1.00 move in any component stock is worth just under 8 points on the index.
Thus a 1.16% move in IBM is worth as much to the index as a 97% move in Citi (closed at $1.03).
If these were the bad old days, and one were looking for the opposite move, up rather than down, then one would look for a way to paint a negative picture, perhaps by taking a high priced stock down while the lower priced issues were firming up.
That's how they used to do it in the old days*.
Here's an interesting picture found at Dow Jones Indexes (note the moving averages):
Dow Jones Industrial Average
UPDATE: From MarketBeat, "One-Fifth of Dow Components Under $10".
*Speaking of specialists in the old days, one of my favorite stories is how Joe Kennedy and the boys decided to form a pool to manipulate the Google of the 1920's, RCA. From our June '07 post "Robert Kennedy Jr., Global Warming and Wall Street":
...Already a wealthy man Joe Kennedy had another Wall Street trick up his sleeve, a classic pump-and dump. In 1929 he and some other rascals got together to run the .com of the day, Radio Corporation of America.
What a run it was! The pool picked up $5 million in ten days. My BLS inflation calculator says that's a bit over $60 million today (although the PBS special linked below says $100 million).
When the question arose as to who should manage the pool the answer was easy. Who better than the specialist in the stock, Michael J. Meehan! PBS did a good job on their show "The Crash of 1929", even interviewing Meehan's grandson. Here are some of my links, Senate Hearings (4 page PDF), 1948 SEC chief counsel memo on the Act of '33 (5 page PDF), Colliers story on the early SEC.
One of Joe Kennedy's most quoted comments:
"It's easy to make money in this market," said Kennedy, famously, to an associate. "We'd better get in before they pass a law against it."
