DDD Technical Analysis and Short Interest Analysis

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This chart is a daily chart of DDD.  I bought a May 29 strike call on it yesterday.

The technical position of the stock is compelling for a rally here in my opinion.  Price has under cut a low from March 2013 (not visible on this chart) and reversed higher here.  Stochastics is showing a weekly and daily bullish divergence on the low Tuesday in conjunction with a very high volume gap down and under cut of the January lows only to reverse and close in the upper end of the range and above the January lows.  This has the appearance of a failed break of support which often provides a high quality long entry.

There is money flow index bullish divergence on the recent leg down, indicating that the downtrend is running out of steam.

The stock is heavily shorted with 33% of the float short as of 1/15/15.  The short interest ratio is 12.5 which is rather high and indicates plenty of short covering potential on a rally.  While I don't have detailed data on the underlying short squeeze trigger price, I am estimating that a rise to the $35-38 level will likely cause some short covering based on the short interest increase from October to December.

Another factor here is that earnings comes out 2/26/15 before the market opens.  Given the oversold technical position of the stock with bullish divergence, I would give better than even odds to a bullish response during this earnings period.

Pete

OAS Short Covering Underway......And Likely to See Further Gains?

In a recent post on OAS I talked at some length about the recent accumulation of a large amount of short interest in the stock and gave an estimate of the average price at which that new short interest may have been accumulated.  I estimated that the 15.00 level or 34 day simple moving average may be a short squeeze trigger price.  This is the theoretical point at which the short interest becomes a net loss.  Any further gains from there really create a forced buying to cover situation on the short position and can lead to significant price advances, often times in explosive fashion.

So here is an update on the current chart of OAS.

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Notice that as price moved to the blue 34 day moving average yesterday we saw a large price move occur, creating a 15% gain or so yesterday.  Then today we saw another 15% move or so.  So part of the equation is that oil has rallied as I have recently suggested would be the case.  But why has the range expanded so much in the last couple days, and why is it outpacing oil gains so much?  Well I think that the short interest has a lot to do with that.

Currently price is now right at the 12/23/14 high which from a charting basis is a likely buy stop point for shorts.  So it may be hard to gauge how rapidly the short interest is being covered, but I think it is logical to assume that there will be more short covering as price breaks through that 17.75 high.

The stock traded huge volume today, way higher than any day in the last 2 years.  I think that also adds evidence of frantic short covering.  How long will it last?  I don't know.  There were 16.9 million shares sold short as of the new year.  The total volume traded the last two days is 37 million shares.  So a significant amount of the potential covering may be done, but I think between new potential buying interest as oil turns up and OAS breaks through chart resistance, and some further short covering potential, this stock may have a good ways to go before it makes a significant high and pause in the buying pressure.

I currently have an order to sell the current option I have on it as the stock price approaches $25.  The option I have is February expiration, $15 strike.  So I am hoping for some more rapid follow through here and a fill of the gap down from Nov 28th prior to Feb 20th expiration.

I may not update further on this one unless someone has a position in it.  But I thought the educational value of the underlying dynamics was of value to follow on an intra trade basis here.


Pete

Testing the 50 Day Moving Average

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Three out of the last four sessions have seen the S&P 500 move up to the 50 day moving average and then pullback to close near the middle of the range.  I believe this is typical evidence of program trading kicking in around the 50 day moving average.

In my experience I believe 1 of 2 scenarios is likely to result.

1) The rally attempt fails here near the 50 day average.  Thus far we have been seeing a basically declining volume rally off the June lows, and there is evidence that there is some initial selling as price pushes into this average.

2) Very soon we see a gap up and a big up day probably with a pick up in the volume.  If the rally is to continue, then once the weak program trading selling pressure is exhausted after several tests of the average, price will often blast through the average and often occurs with a gap.

In these situations I would either switch to a shorter time frame to take trading signals, or await a breakout to the upside of the 6/18/13 high in order to go long.

If prices do manage to make new all time highs, then I think it is possible that the market experiences a further sustained rally.  Markets at new all time highs can often moved in sustained trends as there is no overhead resistance attracting sellers.  The NYSE short interest ratio is at about 4.0 and has risen as prices have risen the last couple years.  From comparison to the 2000 and 2007 bull market highs, that is NOT the pattern we would expect at a bull market high.  The last major highs have been preceded by periods of falling short interest.  In any case, the prior highs topped with a ratio around 4.0, but after coming off of higher levels.  As stocks make new highs, significant short interest can create some forced buying to help sustain the rally.

On a short term basis I personally am looking for an hourly time frame sell signal to develop on this test of the 50 day MA in order to possibly establish short positions for a move to new corrective lows.