Do Charts Agree With Bears on the Most-Shorted Stocks?

 | Jun 09, 2016 | 6:30 AM EDT
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In the past, short selling was mostly a professional activity. Over the years, as the number of derivative securities has exploded, the old relationship of short selling to being just about the prospect of a company has declined.

Some technicians have used the Short Interest Ratio as a contrary opinion tool finding signals to go long when the ratio rose above 3.4%.

Real Money is taking a look at the 10 most-shorted stocks in the S&P 1500 and in this article we will bring in our favorite technical tools.

10. Marriott International (MAR), 36.9% shares held short

In this daily chart of MAR, above, we can see the past 12 months of action. It is hard to ignore the news, even for a chartist, that Marriott was involved in bidding war for Starwood Hotels & Resorts (HOT) and some investors may have shorted MAR because of that development. Looking at the past 12 months of price action there is a downward bias. In just the past three months there is a sideways-to-lower bias in the trading. Prices are below the declining 50-day simple moving average line and below the declining 200-day line. To confuse things, since February there has been a bearish and a bullish divergence between the price action and the momentum study. I don't know if we will have to wait for the HOT deal to close, but for now a close below $65 for MAR would be bearish and it will probably take a strong close above $71 to strengthen the chart.

9. Basic Energy Services (BAS), 38.2% shares held short

Even just a quick glance at this chart of BAS, above, tells you that the shorts have it right. BAS was in a downtrend last year, but the price action this year has been more sideways. Declines below $2 have been rejected slowly, but rejected. Prices are below the declining 50-day and 200-day moving averages. The On-Balance-Volume (OBV) line turned down again at the beginning of May and there is a bearish divergence between the price action in March and May and the momentum study. Both of these clues point to lower prices ahead. A new low close for BAS is possible and that could mean a decline to $1 or lower.

8. Bonanza Creek Energy (BCEI), 39.1% shares held short

The worst may be over for BCEI. In this chart, above, we can see that prices fell from $20 down to just $5. There was a temporary recovery and the next leg down took BCEI to $1. After touching $1 prices have managed to cross above the 50-day moving average line, but they remain below the 200-day average. Since March the On-Balance-Volume (OBV) line has been rising. The math behind the OBV tells us that a rising line means that buyers (maybe people covering shorts) have been more aggressive. The volume of shares traded has been heavier on days when BCEI has closed higher on the day. We will not know who is doing what until the next short interest data release, but for now it looks like the shorts are covering.

7. Carbo Ceramics (CRR), 42.6% shares held short

The shorts still look the winners looking at this daily chart, above, of CRR. Prices are above the 50-day moving average line, but still below the declining 200-day average. The OBV line is weak and confirms the price weakness. While there is a bullish divergence in March and May between the lower price lows and higher momentum readings, the long-running downtrend will probably win out. A decline to new lows is probably the path of least resistance.

6. BofI Holding (BOFI), 43.9% shares held short

The bears must have loved the decline in BOFI. Prices went from over $35 to under $15 in a little more than four months. That makes commodity trading look tame. From a February low, prices have inched up and the OBV line has moved higher. In the short run BOFI is likely to trade sideways between $22 and $15.

5. Lannett (LCI), 44.4% shares held short

The worst is probably over for Lannett (LCI). In this daily chart of LCI, above, you can see how prices fell to under $20 from over $60 in a few short months. Since March prices have moved sideways. As prices have stabilized LCI has attracted some buying. The On-Balance-Volume (OBV) line began to rise last month signalling that buyers were more aggressive. Prices are back above the rising 50-day simple moving average line but still below the declining 200-day. The Moving Average Convergence Divergence (MACD) oscillator is above the zero line for an outright buy signal. I would look for LCI to trade sideways from the low $20s to the upper $20s.

4. Outerwall (OUTR), 48.6% shares held short

Outerwall (OUTR) declined to the mid-$20s from the mid-$80s (see the chart above) with a couple of gaps to the downside along the way. Since a low in February we have seen the price improve but the OBV line is flat and is not signalling any significant buying. Prices have improved enough to test the declining 200-day moving average line. Without signs of more aggressive buying or accumulation I would look for OUTR to trade sideways to lower in the weeks and months ahead.

3. LendingTree (TREE), 50.7% shares held short

LendingTree (TREE) had a peak in August around $140 and it fell to near $50 by February. From the February low TREE doubled in two months and then corrected to $70. The OBV line has moved up and down with the price action. TREE could see a $110 to $70 trading range in the weeks ahead.

2. Adeptus Health (ADPT), 52.3% shares held short

This chart of Adeptus Health (ADPT), above, shows the stock's fall from grace. In just seven months the shares declined from more than $120 to less than $40. From the February low the OBV line has risen, until recently. Prices are above the 50-day moving average and was briefly above the the 200-day. ADPT looks like it is rolling over again and a decline to $50 or lower may be the next move.

1. Cal-Maine Foods (CALM) 55.3% shares held short

The downtrend in Cal-Maine Foods (CALM) is probably not over and we could see a deeper slump to next support around $35 in the weeks ahead. In this daily chart of CALM, above, we can see a decline from the low $60s to $45 followed by a recovery to $55. In March, prices turned down again from $55 and have sunk to new lows for the move down. CALM is below its declining 50-day and 200-day averages. The OBV line is pointed down with price since early May. Recently there is a small bullish divergence between the lower prices and higher momentum readings, but the downtrend is pretty secure-looking with the break down below $45.

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