When a stock is supposed to fall, but doesn’t…well, it’s telling you something. Here’s my take..
Discussed in this article: Quintiles Transnational Holdings ( $Q )
Let’s take a look at SolarCity ( SCTY SolarCity Corp ). I want you to be careful of this stock; solar stocks have been on fire lately, pardon the pun, but they’ve really been rockin’. SolarCity’s ( SCTY SolarCity Corp ) been one of the big ones.
It just started trading back here in December of 2012, so here’s what I want you to understand. If you look at the weekly chart you’ll see; Bollinger Bands start forming at twenty-weeks because they’re standard deviations above and below the twenty-period, here weekly, the twenty-week moving average; they’re supposed to contain 90 percent of all closing prices. Well, that’s a statistical thing, so ever since these things were born, one, two, three, four, five weeks in a row SolarCity has ( SCTY SolarCity Corp ) closed outside the upper Bollinger Band; that’s like the definition of a strong stock. Well here, this last week, the entire trading range was outside the upper band. Look at the volume here, really big volume over the last couple of weeks so there’s clearly a lot of activity, and it’s all aggressive buying.
So, with that said, now we have to look at the volatility. This has become almost violent, 20 percent swings in this stock from top to bottom, over 20 percent; I think this stock is in trouble. If you are long I think you want to be really considering closing out your longs. I wouldn’t be shorting the stock yet, but I do think that this is setting up to be a pretty nice short, and here’s why.
Within the next three weeks, remember, this just started trading back here; there are like sixty-million shares that are restricted, can’t trade them, folks that own them, owned them from down here, possibly a lot lower depending on how they got those shares; they’re not able to sell those now. In the next three weeks they will be able to sell them and so the dynamics of a short squeeze are that those shorts need to cover their stocks or they need to cover their positions and they can’t find enough shares; there is just not enough liquidity. So they have to keep paying higher and higher prices, that drives a stock up and as a stock moves up then it also attracts natural buyers, those traders that are on the sidelines. They see the stock move in and they say, “I want to be part of that, I want to get in on that.” That pushes the demand up even more, it just becomes like this whirling dervish of buying, like a feeding frenzy.
Ultimately though, you can see what’s happening here. I want you to be careful of this and watch for the short. This may very well turn out to have been the top right here, or it may not. Don’t get in front of this, don’t get in front of this and try to short this stock now, it may very well turnout but that’s really the higher risk trade. The lower risk trade is to stand by and watch this, watch for the turn. This is so far extended above the 50-day moving average and the 20-day moving average; it’s so far extended that when this thing turns there will be plenty of time to short stocks. Just watch for it, wait for it, my bet is you’re going to have a good trade out of this.