Friday, May 10, 2013

Blackberry -  mechanics of the coming short squeeze

Last summer Blackberry shares started new bull market. Up till now this bull had three stages:

Stage 1 (September 2012 – January 2013) -  that phase was created by the lack of smart money distribution and new buyers power predominating the power of short sellers

Stage 2 (January 2013 – March 2013) – correction created by smart money distribution

Stage 3 (March 2013 – April 2013) – smart money accumulation together with the decreasing dynamic of new short selling.

The points beneath show in detail how and by whom this bull was developing.

1.    Smart money

This concept is built on the premise that the most important phases of daily sessions are the beginnings and endings. The beginning of the session “belongs” to dumb money, i.e. small, amateur investors reacting very emotionally – it is that time when they are trading very actively. By contrast, smart money, i.e. big, experienced investors are active at the end of the trading day. Taking into consideration these assumptions one can construct the index showing what smart money does in the market. In case of Blackberry that index is presented in chart 1.

As the chart shows, the Blackberry bull market started on 24th September 2012 with the share price $6,22. The first wave of the bull reached its maximum on 28th January 2012 with the price $18,32. It means a profit of nearly 200%. During most part of that bull stage smart money did nothing – they neither were selling nor buying new shares, just stayed where they were. It’s changed  since the beginning of 2013 – since then, smart money started reducing its long positions quite aggressively, lowering the share price to the minimum at $12,55. Volume in that period was huge (in the average 67 mln. shares daily). That stage lasted till March 2013.

Then, in the beginning of April, the situation changed. Since that time smart money seems to be accumulating shares again though rather delicately (look at the smart money index under the red segment). Using technical analysis we can spot the wide triangle forming since the end of January 2013. Such technical pattern often means the continuation of the existing trend.  


2.    Short interest.

Chart 2 shows the changes in the amount of shares sold short by the investors on the assumption that the share price will go down. Red segments on the chart indicate the change in short interest during two-week periods whereas green segments show the range of share price changes in these periods. What interests me the most is the current Blackberry shares bull market so I will focus myself on the set of data starting in September 2012.

As the chart shows, short sellers were using current bull market to build bigger and bigger short positions. This is a typical behavior during secular bear market. Any rally in share prices is treated as the opportunity to go short. And because the bear market in Blackberry shares started in 2008, investors minds were anchored to such a behavior very strongly.  Suddenly, last summer the trend changed but investors psyche didn’t (humans are quite stubborn to change their minds). Therefore they continued to build short positions even more aggressively as share prices were going strongly up. It is visible on the chart – generally the higher the price the bigger new shorts added. The climax was reached in the end of 2012 when 17,5 m. shorts were added.

2013 is quite a different story. Those shorting Blackberry started to have doubts. Things weren’t going as smoothly as they wished. For them, something was wrong with the market – it was going higher and higher. January 2013 was the critical month – it was then when some of short players changed their minds radically. As the price of Blackberry shares went from $11,87 to $17,90 within January they reduced their shorts by 7,6 m. shares. It’s not too much but what is crucial is that this time the attitude has changed – instead of shorting more shares, as usually, they liquidated part of their position.

Since that time we can see the different behavior – lower prices are being used to build short positions and higher prices generate more doubts. In the effect, less shares are being shorted during rallies (e.g. very small red segment at the end of March when only 0,7 m. shares were shorted during share price rise). 

In my opinion, this is a sign of ongoing fundamental change in investor minds. As the bull market in Blackberry shares develops the dynamic of rising short sellers positions appears to drop. At current phase of bull market the critical is the price range $13,6  - $16,8 – i.e. the red segment when only 0,7 m. shorts were added (pivotal point A).



Looking at the charts above I assume that the crucial battle between bulls and bears will take place in the price range $13,6 – $16,8. The price rising above $16,8 could trigger the short squeeze.  And because the short position in Blackberry shares is very elevated at the moment the eventual squeeze could have tremendous effect on the share price.

But currently the battle is ongoing.

To be continued……

No comments:

Post a Comment