I don’t believe the huge short position will be covered substantially by holding the price in this narrow range but most of the low volume the last several days was likely cover buys from sellers using stop losses set at a few pennies below a purchase toward the upper end of the trading range that has existed. Also, I don’t believe even short selling can take this to zero – buyers would come out of the woodwork to snap up every share and there would be very few shares made available. And you may be right that the short interest is increasing but that would be folly for the sellers at current prices.
Watching the prices move in this tight trading range day after day is bound to be attracting some sellers who have a much higher cost per share to attempt to sell at say $1.20 with a replacement purchase of say $1.14. 6 cents divided by $1.14 is a healthy 5.26% gain with such a move. I have seen several comments on this board, perhaps including you, about holding a core position and a trading position – the trading position representing buying and selling within the current range. The risk here is the possibility that the stock will suddenly rise rapidly on an upward trend and the opportunity cost for getting the intended long position back could much more than offset the several gains from multiple selling and buying within this range.
All this is happening within the context of the meltdown in the financial sector and that condition is not likely to soon change. But daily volume has declined and I believe that there is support, even by the shorts, just north of $1 and so the number of folks participating in selling, whether it be shorts, naked shorts or day traders, is in decline. The stage is being set for an upward trend, perhaps kicked-off with the Q3 earnings release.