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The Low-Down on High Short Interest Stocks

John Darsie

The S&P made a new all-time closing high Monday and now the only thing in the way of this market freight train is all-time intraday highs of 1597. Last week we got an impressive bounce off the 50-day moving average that put the market back into rally mode after a period of erratic action, and traders are back to scanning the market for charts that still potentially have some upside.

Economic growth has certainly not been driving market strength, as the most recent jobs and GDP reports were extremely weak. A low-rate, high-QE environment is boosting risk asset prices globally, and as long as inflation remains in check the US Fed and others could continue to grow their balance sheet. This week we have both a Fed and ECB meeting, with speculation growing louder that the latter could opt for a rate cut. Today is the last day of April, so we also have the customary ISM reading tomorrow at 10am ET, and then the jobs report on Friday. It's hard for traders to put much emphasis on them though because of the market's seeming indifference to the economy.

The Nasdaq displayed relative strength from the outset yesterday and could see money continue to rotate in. Traders are looking for pockets of the market that are not overbought, and select tech stocks appear to have room to run. Major sector components Apple (NASDAQ:AAPL, Google (GOOG), and Microsoft (MSFT) all settled with gains of at least 2.5% yesterday.

Stocks with high short-interest have also been very much in play as they squeeze their way higher. When you have a stock with extreme short interest, breakout moves can often go further, faster than anyone expects, so keep these names on your radar.

First Solar (FSLR), with a short interest of 36.10% and short ratio of 2.5, has been on an extraordinary run in April after issuing revised guidance. After spiking more than 45% intraday on April 9, the stock saw another short squeeze on Wednesday last week as it broke above the prior pivot high of $41. FSLR is currently flagging above the top half of Wednesday's igniting move again, signaling the next round of the short squeeze could be around the corner.

Tesla (TSLA) is one I have highlighted several times in the Morning Call and on Twitter (@DarsieT3Live) in recent weeks as a potential short squeeze candidate. The electric car maker consolidated in a wedge-type pattern for the three years after its IPO, and recently broke above the key $40 resistance level to ignite the squeeze. CEO Elon Musk, one of the most well-respected CEO's in business, has been aggressively using twitter to push back against negative press and to promote the Tesla brand. Tesla is expect to announce in its upcoming quarterly earnings report on May 8 that it sold 4,750 of its Model S sedans, which start around $70,000. The stock saw another push of more than 6% to a new high of $54.97 yesterday. Perhaps wait for a slight rest in TSLA, but I think the stock has more upside. An analyst from Longboard Asset Management said he thinks TSLA will be a $200 stock in five years.

Netflix (NFLX) has been on fire in 2013 with two big gaps up on earnings on January 24 and April 23. It has a high short ratio of 1.9 and 7.49M shares short in prior month according to Capital IQ. After successfully closing the bearish gap from September 2011, it's holding nicely above the recent earnings gap at $209.51. The longer it holds above this gap, the higher possibility we could see higher prices moving forward. We love to see these tight upper level gap-and-flag patterns in highly shorted stocks.

JC Penney (JCP) got some attention yesterday after the New York Post reported that two major hedge funds -- one worth more than $10 billion -- have taken up big chunks in the troubled retailer. This came after word of George Soros's stake in the company drove a massive push at the end of last week. The stock has 36.80% short interest, with a high short ratio of 2.70. The stock pushed higher by another 1% yesterday and is approaching its 100-day moving average at $17.86. Reclaiming this key moving average would add some fuel to its rally. After that, JCP has the gap from February 28 as the next obstacle.

Cliff Natural Resources (CLF) has short interest of 25.80%, and a high short ratio of 2.3. The stock saw a nice short squeeze on Thursday last week after reporting its first quarter earnings result on Wednesday, gaining nearly 15% in Thursday's trading session. The highly levered mining and natural resources company is holding nicely above the gap from Thursday -£ a break above its 50-day at around $21.65 could lead us to another round of a short squeeze.

Banks are flagging above support levels, and could provide a big boost to the broader market if leaders can get back to pivot highs.

Citigroup (NYSE:C) has emerged as the leader of the group after the most reason bank earnings season. The stock held in best during the most recent sell-off in the market and is currently flagging nicely above all key moving averages. A move through $47.92 with volume could bring in more buyers.

JP Morgan (JPM), after finding some support at 100-day, also saw a nice rally that took it back above all key moving averages. The bank is flagging and resting around the 50-day, and the longer it holds above current support of $48.60, the higher chances we believe it could see the next breakout above $49.60

Bank of America (BAC) put in a bottoming tail at the 100-day on April 18, giving a great entry point. After that, the stock pushed higher into the intermediate resistance at $12.50, and is now digesting the current gains well. The longer it holds above its 8-day at around $12.21, the greater odds we could see a retest of the current high at $12.94.

Goldman Sachs (GS) has been lagging a bit in the group and is mired in a descending channel. It is now flagging at its 21-day MA, and has some resistance at the $147-148 area. A move through this area could help it breakout of the descending channel that started with February's peak.

Apple (AAPL), after closing above its 8-day on Friday on above-average volume, saw another push higher of more than 3% yesterday before running into some resistance at the 50-day. The stock closed on highs yesterday, which is a bullish signal for traders to look for follow-through. On the flip side, the last time AAPL retested its 50-day in March, it saw a push-through failure. Will it happen again this time? Personally, I think AAPL feels stronger this time around and could be starting a bigger bounce.

Chitpotle (CMG) topped earnings expectations on April 18th and put in a nice igniting bar the following day. Now it's flagging above the top half of this wide range bar and holding above all key moving average. A move through $367 on good volume could take out the current pivot high of $372 and take us to higher prices. The next resistance after that is $384.50 from May 2012.

On the bearish side of things, Amazon (AMZN) saw a wide range bar down on Friday after reporting a disappointing quarter. The stock shed another 2.06% yesterday and is right at its 200-day moving average. As we mentioned on the Morning Call yesterday, if AMZN doesn't hold its 200-day, it could be due for a bigger correction.

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*DISCLOSURES: John Darsie is long CLF