Supercharged FCEL Makes A Break For It

12/12/07 09:33:16 AM

by Matt Blackman

Here's a textbook case of a short squeeze in action. In this case, powerful technicals and compelling corporate news helped.

Security: FCEL
Position: Accumulate

My November 8th Traders Advantage article on FCEL discussed the cup-with-handle pattern that was developing, combined with the fact that it had broken above its squeeze trigger price or level at which a potential short squeeze had formed. With the uncertainty and weakness that followed in the markets, FCEL suffered along with many stocks breaking down through squeeze trigger support.

Then the stock enjoyed the market rise as stocks rallied, but as FCEL was up more than 25% in just six days, something else was at work. What caused this impressive breakout?

FIGURE 1: FUELCELL ENERGY, UPSIDE BREAK. This chart shows the upside break of a squeeze trigger following the Buyins.net news release accompanied by a 26% jump in the stock price. The 50-day volume moving average on December 11 was 743,000 shares, so lots of liquidity was present. The green arrow in the lower subgraph shows the volume spike on December 11.

Graphic provided by: OmniTrader.com and www.Buyins.net.

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 that are 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 the news release issued on December 5 highlights, a total of 10,863,800 were held short at an average volume weighted or squeeze trigger price of $9.292. This meant that at the time, short-sellers still needed to buy back approximately $102,880,186 worth of shares to cover their short positions, which represented 12.7 days of average daily volume, according to Buyins.net. That kind of buying will drive just about any stock significantly higher, which is exactly what occurred over the next six days.

Then an announcement by FCEL on December 11 that it had sold 4.8 megawatts of ultra-clean power plants to KOSCO of South Korea put the beleaguered shorts under even more pressure, causing the stock to gap higher, as they had to compete with investors and institutions buying the news.

This move by FCEL is a good example of what can happen when strong technicals (namely a potentially powerful chart pattern), a short squeeze, and good fundamental corporate news are combined in a timely proactive manner and how savvy stock traders who are watching for these situations can profit.

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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Supercharged FCEL Makes A Break For It

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