Shares of controversial nutrition company Herbalife Ltd. (HLF) are off to a big start this week, as shares rallied nearly 10% higher to kick off Monday's trading session on a torrent of news.
Herbalife revealed to investors that the company had previously been in talks to go private, and that it had initiated a buyback plan and a pact with its biggest investor, Carl Icahn. The disclosure revealed that talks with a prospective investors ended on Aug. 16 without a deal to take the company off the public markets, but investors are seeing upside in that update. The idea that third-party investors are sniffing around a potential going-private deal for HLF could bring more suitors calling.
Herbalife is also offering to buy back as much as $600 million in stock, and has made an agreement with billionaire Carl Icahn that keeps his stake below 50% unless he agrees to outright buy the company.
The news comes as a blow to Icahn rival Bill Ackman, who along with others, is actively shorting Herbalife. As I write, more than 35% of Herbalife's float is being shorted, a fact that makes this stock a major short-squeeze candidate.
In the meantime, betting against Herbalife might not be a great move -- shares are primed to rally another 9% in the near-term after Monday's trading setup.
To see why, we're turning to the chart for a technical look:
It's not exactly accurate to say that Monday's Herbalife bounce was 100% news-driven. That's because shares ended last week sitting right at $62, a key technical support level that's been significant to HLF all year long. Simply put, shares were sitting on a price floor with plenty of room above them to charge higher -- that helped add upside potential to Monday's 10% pop.
Likewise, HLF shares were at a convergence point between that $62 horizontal support level and the trend line level that's been bounding this stock's uptrend since shares bottomed in December. That double-dose of price support greatly mitigates the risk of being a buyer here.
Thing is, that rally only brought shares about halfway to their next meaningful resistance level up at $74. From here, that's about another 9% upside move to reach that $74 ceiling for shares -- or potentially more if a short squeeze takes over.
Momentum, measured by 14-day RSI up at the top of HLF's chart, adds some extra confidence toward an upside move in shares. That's because our momentum gauge made a pretty textbook example of a failure swing bottom with Monday's up-move in shares, sending a trading signal that buyers are back in control and more upside is likely ahead.
HLF is still a drama-filled stock, no doubt. But for traders willing to stomach the back and forth between billionaires, now looks like a good time to be a buyer.
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