Friday, May 16, 2008

Short squeeze?

I am basing my LDK trade off long term fundamentals, but I realize that 99% of the price action is technical with little barring on the company so here are my thoughts on the situation.

I don't trade on technical information, so I don't have any proof of my ability to read the tape. As far as I know, I could be talking out my ass. Anyways, here is my analysis of the based of my intuition or feel for the markets.

One thing that has been a major theme of LDK is that it has high short interest. For the most point, you would have made money in the stock going short in LDK. One pattern I noticed a lot was that LDK would show some sign of strength in the morning, while doing a slow decline on low value throughout the day. After each sign of strength on news, LDK eventually gave it all away in the following days.

Being long through this period was just painful. There were days that I knew that my holding in LDK were going down, either from heavy shorting or panic selling. I saw it happen over and over, using it to my advantage to average down, buying more shares at the lower price because I stubbornly knew LDK was way undervalued. Still this pattern went on for months and months, and it looked like it would have never turned around. I assumed that either I was insane, or the market was.

About two weeks ago, I noticed that the technical situation has been doing the opposite. Instead of a slow sell off throughout the day on low volume as expected, there were huge spikes up in price and volatility. I assuming that these were short squeezes, because they always occurred at a breakout, and LDK just has ridiculously high short interest.

Even after the recent sell off after earnings (which were great IMHO), the price quickly found support and started to rise again. Before these sell offs would have just created a massive panic, and the price would plummet 10% or more for the day with an additional 20% the following week. Something is different about the this stock, like there is actually real strength supporting it.

For the first time, I am not only confident in the fundamentals, but also the technical strength of the stock. Shorting this stock is not profitable anymore, and I think traders will eventually get the idea or risks getting stuck in a massive short squeeze. It is only a matter time before this baby takes off.

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