Traders Brace for Dangdang Short-Squeeze Rally

NEW YORK ( TheStreet) -- E Commerce China Dangdang ( DANG), the "Amazon" ( AMZN) of China, extended its recent momentum Tuesday. The stock rose more than 11% to settle at $5.17 a share as traders bet that the the company will beat earnings estimates this Thursday.

As one of the most heavily-shorted names on the street, and as the hurdle for beating earnings estimates stays low, the stock has the potential to rally after the report on any bit of good news.

Tesla ( TSLA) and Green Mountain Coffee Roasters ( GMCR ) are recent examples of high short-interest names that spiked much higher after solid earnings reports forced short sellers to cover their positions.

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"Should they report any good news, there's more than enough shorts to spark a big rally," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati. " Any good news could be what is needed to spark the match."

According to Schaeffer's Investment Research, Dangdang shares have consolidated to a tight range of about $3.60 to $5 since October, creating a base off of which a rally could occur.

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Year-to-date, Dangdang has soared 25% on optimism about the company's first-quarter earnings and after the company launched limited deals like Amazon and eBay ( EBAY) to encourage impulse buys. Furthermore, the company revealed in April more initiatives to drive digital sales with the release in May of a new touchscreen e-reader similar to Amazon's Kindle.

On Thursday before the U.S. market open, Dangdang is expected to report a first-quarter loss of 18 cents a share on revenue of $214.44 million, improving from a loss of 20 cents a share on revenue of $172.07 million last year. Chances are the company can even exceed earnings expectations on improving margins, thanks to its growing emphasis on the marketplace business unit.

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However, second-quarter guidance could come in below expectations as the company steps up its aggressive promotions for marketplace. In addition, the company's strategies for improving margin could come under threat in the face of fierce competition.

Written by Andrea Tse in New York

>To contact the writer of this article, click here: Andrea Tse.

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