Fuelcell Is Supercharged, But What Else Is Going On?

11/08/07 02:12:36 PM

by Matt Blackman

Oil is heading higher, and it is pulling a whole array of stocks with it. Here is one stock that also has some compelling technicals in its favor.

Security: FCEL
Position: Accumulate

Rising energy prices have affected all segments of the stock market. While stocks in the Dow Jones Transportation Average (DJTA) have been challenged, energy and alternative energy stocks have been strong benefactors. One that looks compelling is Fuelcell Energy (FCEL) (Figure 1).

FIGURE 1: FUELCELL, DAILY. FCEL shows the decline to early 2007 volume capitulation, then rally and stock price above the SqueezeTrigger price (green dashed line) as well as a forming pennant pattern (red lines) and a building cup & handle (blue lines), all of which are bullish.

Graphic provided by: http://www.OmniTrader.com, http://www.Buyins.net.

Fuelcell is engaged in the development, manufacture, and sale of fuel cell power plants for electric power generation. It is in the energy (other) industry along with 55 other companies, including recent market stars JA Solar (JASO), Yingli Green (YGE), and First Solar (FSLR), as well as less impressive performers like Ballard Power (BLDP). Technicals have been challenged over the last few years, and even BLDP is beginning to show signs of life. It recently broke above its long-term downtrend resistance line.

As a developer of energy systems, FCEL's fundamentals aren't all that appealing. It has a negative earnings growth and negative earnings per share. It also has a relative value based on forecasted earnings over the next one to three years of 25% of the current stock price. But stocks in this industry are research plays that have typically sold on hope and hype, not fundamental valuations. They tend to be most frisky at times when traditional energy supplies are getting squeezed.

In a recent Bloomberg interview, oil mogul T. Boone Pickens said that current world demand for oil is 85 million barrels per day, but estimated current demand at 87 to 88 million barrels. This has helped push an array of stocks in the alternative energy field into the stratosphere.

What makes Fuelcell compelling is that it was featured in a recent SqueezeTrigger list from the Buyins.net daily list of stocks in or nearing potential short squeezes. To initiate a short position, the trader must borrow the stock then sell it. The trader profits if the price falls. Buyins.net tracks data, including short positions on more than 15,000 stocks trading on US exchanges and identifies those that are nearing the SqueezeTrigger or cumulative average price, at which the shorts initiated their short positions. A short squeeze is said to occur when a sizable percentage of the company's stock has been shorted and where the price approaches or surpasses the level at which short positions were initiated. In a rally, the motivation by short-sellers to buy the stock back to cover the positions increases. The higher the number of shares sold short, the greater the potential lift. In the perfect bullish scenario, a short squeeze helps catapult stocks higher than they would normally go with minimal short positions.

As of November 6, 2007, there were more than 10 million Fuelcell shares sold short, which was 16% of the float. The cumulative SqueezeTrigger price was $9.29 and FCEL closed at $9.88, which means the shorts were feeling increased pain as the stock price moved up. This pressure has been compounded by a rally on moderate volume since early 2007, so the trend is definitely not the short's friend. With such a large percentage of the float to be bought back to cover, there is good potential for higher prices ahead as the shorts get increasingly squeezed.

Not only can the SqueezeTrigger price act as an alert, it can be also used as support and a potential stop-loss should the stock reverse direction. For those with higher risk tolerance, the next level to consider as a stop is just below $9.00, where significant price volume support currently sits. Buying stocks in potential short squeezes works best in a rally and is not advisable during a downtrend.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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