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On July 11, the stock of a little-known healthcare IT company opened at $3.00 per share. Within an hour of the opening bell the next morning, it rocketed as high as $10.89 — a 263% gain in 24 hours.
If you are an active momentum stock trader like I am, you might remember this one lighting up your trading screen.
I have been watching it like a hawk since then, and today, I’ll explain why I think everyone needs to be solely focused on just this one stock:
Healthcare Triangle, Inc. Nasdaq: HCTI)
As you start your research on this one, go back and look at the explosive gain on July 12th. That will give you a feel for exactly the sort of move small stocks are capable of…
All it takes is one press release… one earnings report… one news story…
But my primary interest with HCTI isn’t what the big jump in valuation meant for investors.
Honestly, I don’t even really care about the news that caused the stock to soar — I care about what this means for short sellers.
Take a look at this chart:
You can see the big jump on July 12, followed by a dip down and a consolidation around $4.20 that’s held steady over the last three weeks.
Three weeks.
HCTI makes an epic move of over 200%, and then the stock trades sideways in an extremely narrow range for nearly a month.
This is the kind of price action that should make you very, very afraid… that is, if you are short the stock!
If you aren’t familiar with what “shorting” a stock is, it basically means that traders are “selling” the stock without owning it. They want to buy it back at a future date, and hopefully a lower price. If that happens, they will pocket the difference as their profit.
But what happens if the stock doesn’t go down? What happens if there are more “shorts” out there trying to buy the stock than there are real sellers?
Well, this imbalance is what we call a “short squeeze.”
It is when shorts are scrambling to buy back shares, and create an upward spiral that forces other shorts to also buy back their shares at a loss.
Charles Schwab has a great description of this phenomenon. Take a moment and read it if you want to brush up on how a short squeeze can work.
If you have been trading for a few years, you have probably seen AMC, GME, TSLA, BBBY, CVNA, etc. make some INSANE moves higher that left you scratching your head. 🤯
There was a ton of organic interest in those stocks, to be sure, but the mega jumps were often due precisely to the “short squeeze” phenomenon.
But back to HCTI…
According to SeekingAlpha, short interest in HCTI is currently at about a staggering 18%.
On top of that, the number of shares available to borrow (the blue bars on the chart below) have plummeted since July 20, and the borrow fees (the red trendline) have soared to an astronomically high 523%
This means there is an acute shortage of fresh shares to borrow, and the fees that shorts have to pay to hold the existing shares is painfully high.
(Imagine sitting on a position you had to pay over 500% interest on!)
These are some of the highest borrow rates I’ve come across, especially for a stock with such a small market cap ($17.4 million, per Yahoo! Finance).
Even during the height of the “meme stock” craze, when massive institutions were heavily shorting the stocks, GameStop’s borrow rates didn’t top 130%.
Folks, this is bad news for HCTI short sellers.
As you may have picked up during the whole meme stock saga, short sellers rely on borrowed shares to bet against stocks.
When a stock price jumps like HCTI did last month, you typically see tons of people shorting it. High short demand means low supply of shares to borrow and high fees to do so.
You can check out this article in its entirety for more on the importance of high borrow fees, but for our purposes, this is the money quote from S3 Partners analyst Ihor Dusaniwsky:
“An increase in stock borrow rates may force (squeeze) some short sellers into closing their positions — getting out to realize their remaining mark-to-market profits and exiting before other buy-to-covers drive the stock price up.”
Let’s look at a recent example with Carvana (CVNA) from just last month.
Keep in mind that the stock is up a mind-blowing 858% so far this year, as you can see in the graphic below.
Is this because it is a fantastic company that is blowing away earnings estimates?
No. It’s not even a great company at all, if you ask me.
I think the reason is that CVNA is one of the highest “short interest” stocks in the market right now (as reported here and shown in the chart below)
Now, let’s talk about the ideal setup I look for in a “short squeeze.”
#1: We have to have a high level of short interest (I think we already determined that for HCTI).
#2: We have to see a chart pattern that has a violent move higher, followed by a “pause,” where the stock trades sideways for a period of time. The next move after that is typically higher… sometimes much higher.
I outlined what that looked like for CVNA just last month when on two occasions it jumped over 100% higher.
Sideways… then breakouts higher. Textbook moves right here.
Does it work 100% of the time? Of course not, nothing in the market does. But go back and look at lots of stocks with high short interest and see how often you see similar moves.
Now look at where we are with HCTI.
If we compare the current price to the typical price over the last six months, we can see that the consolidated price is at a higher plateau compared to the preceding months:
This means the stock hasn’t dropped nearly to where short sellers would prefer. This could mean big trouble for them… and big profits for regular investors.
You won’t find an opportunity like this very often, and barring some ugly piece of news, I think this is a “cupcake setup.” 🧁
The stock made the violent move higher, and now it is in the “waiting phase” as it looks for the next direction.
As traders, we have to look for “clues” as to what that direction could be. 🔍
The key level I’d look for would be a move into the $4.20–$4.30 area, since that would be above the recent price over the last week or so.
If that breaks, then I can only imagine how many shorts might decide to throw in the towel and exit their positions.
Now let’s look at some other indicators for HCTI right now.
The first is pure momentum.
One of the first things I ask myself when looking at a potential trade is, “How is the stock trading versus the overall market in general?”
Well, you can clearly see HCTI has outperformed compared to the SPY on just about any timeframe this year.
(source: SeekingAlpha)
Then, look at key technical indicators and market oscillators. Here is a great overview from Barchart showing a whopping 88% buy rating on their indicators.
Why is the market so optimistic about HCTI this year?
Well, on top of all of the great news they have been issuing (like the July 12 news that shot the stock up over 200% in a single day), HCTI has been executing very well if you consider growing sales to be a success.
And Wall Street is starting to pay attention.
Barchart reports a perfect “Strong buy” rating from the analyst coverage it reports.
That “strong buy” rating comes from an analysis by investment bank EF Hutton. They released their report with a split-adjusted (HCTI did a 1-for-10 reverse stock split in May of this year) price target of $20 back in September 2022.
That’s nearly 400% higher than its current $4.07.
(source: MarketBeat)
All of this suggests that short sellers are out on a limb, and an upward price move could be imminent.
And like I said, a small tick up could set off a cascade of shorts covering their positions. But without the available volume for them to do so, they could panic and start to buy shares at any price.
If that happens, as the meme stock “apes” were fond of saying, the stock price could go to the moon. 🚀
Just because I like a stock doesn’t mean it is going to work out like I think it could – it might do better, or worse. If you decide to trade it, make sure you understand all the risks involved and have your own game plan in place. A good place to start is by visiting the company’s website and getting to know more about the story.
I am simply showing you something that I think is an outstanding opportunity to look at right now, but you have to make your own choice and take ownership of your own trading.
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