Let's check in on the first quarter's most heavily shorted momentum stocks to see how they've fared through earnings season and last week's volatile selloff. Have short-sellers finally won the battle, or are these issues poised to recover and head for even higher ground in the weeks ahead? More important, do they now offer timely entries for market players on either side of the aisle?
Excessive short interest is common in a high-multiple growth stock, increasing the upside with positive catalysts and the downside with negative catalysts. In both cases, the high population of short-sellers escalates volatility because these folks tend to make more emotional trade decisions than regular shareholders. In the same vein, algorithms capitalize on these dynamics by targeting common support and resistance levels, triggering major shakeouts.
is the reigning king of the growth stocks, rising more than 250% between July of last year and the February high at $247. It then dropped into a vertical correction that filled the January breakout gap (red lines) in mid-March. That move marked the low, ahead of a strong recovery that exceeded the February high by 7 points, one day ahead of its first-quarter earnings report.
The news triggered a gap (red circle) that dropped the stock more than $25 in just three sessions, finally landing at support at the 50-day moving average. Price has been basing at that level for the past two weeks and finally looks ready to fill the gap. With accumulation showing a series of lower highs since December (black line), this recovery attempt is likely to hit a buzzsaw of selling pressure.
hit an all-time high at $110 (black line) in 2004 and entered a long decline that bottomed out at $3.72 at the end of the bear market. The subsequent recovery was strong and swift, lifting the stock to within 6 points of the mid-decade high just two weeks ago. It then got pummeled by intense selling pressure after
announced it was entering the local deals Web space.
The decline began just under the 2004 high, which marks heavy resistance and a natural ending point for a strong uptrend. These types of turnarounds often retrace 50% to 62% of the prior rally wave, suggesting a final target in the lower $60s. The selloff dropped price onto support (blue line) in the low $70s last week. It should bounce soon, but the recovery is likely to fail below resistance in the mid-$80s (red lines). That would be a great spot to reload short positions.
Green Mountain Coffee Roasters
has defied the wrath of short-sellers since last September, when the company reported accounting irregularities and dropped 30% in just eight sessions. The October low at $26.14 marked the bottom, ahead of a broad basing pattern that yielded a February breakout and vertical uptrend, more than doubling the stock's price in the past three months.
Despite the amazing strength of this momentum favorite, classic gap lore outlined by Edwards and Magee in their 1948 classic
The Technical Analysis of Stock Trends
predicts the end of the uptrend and the start of a correction that could be deep and painful for currently ecstatic shareholders. The decline should start with the filling of the exhaustion gap between $65 and $75, followed by a persistent downtrend that eventually fills the continuation gap, dropping price into the mid-$40s.
returned to within 4 points of the 2007 high (blue line) in December of last year and broke out on heavy volume, entering a strong uptrend that added more than 40 points in the first four months of 2011. The stock topped out at $103 on April 21 and entered a modest pullback that found support last week above the 50-day moving average.
The recent decline looks similar to the January and March downswings (green boxes), pointing to a simple resting period within a strong advance. Selling pressure has been minor so far but the stock might not be ready to test the April high and resume its uptrend. It also has to deal with round-number resistance at $100, which typically demands an extended basing pattern. Given the technical setup, longs should hold positions with loose stops while short-sellers stand aside.
came public at $24.50 in May 2009, ground sideways for nine months and then took off in a powerful rally that hit an all-time high at $118.66 just two weeks ago. The stock pulled back in a quiet pattern for a few days and then dropped like a rock, giving up 25 points in two sessions, in a negative reaction to first-quarter earnings.
The selloff cut through the 50-day moving average at $100, with price bouncing back into the mid-$90s this week. This recovery attempt should fail between $98 and $103 (red lines), marking a decent short entry, ahead of a secondary downswing that breaks the recent low at $87.23 and heads toward the 200-day moving average, currently near $78.50.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
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. He has written two books:
, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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