By Stockpickr Staff
Posted on Mar. 12, 2009

Is the current surge in the Dow Jones Industrial Average a big short squeeze rally?

A short squeeze is a rapid increase in the price of a stock or index that occurs when there is a lack of supply and an excess of demand for a stock or index. Short squeezes result when short sellers cover their positions on a stock or index. This can happen if the price has been driven up to a point where they want to get out and cut their losses. Since covering a position involves buying shares, the short squeeze can spark an even bigger rise in price, which can then cause additional covering.

Due to the current bear market, there are many stocks with extremely high short interest, such as Wynn Resorts (WYNN) at 31%, MGM Mirage at 33%, Buffalo Wild Wings (BWLD) at 33% and Palm (PALM) at 35%.

Let’s take a close look at four compelling stock charts of companies with high short interest that could be setting up to move much higher.

1. Blue Nile

One stock with a very high short interest is Blue Nile (NILE). Currently, over 50% of the float on NILE is sold short and the float is very small, with only 13 million shares available for trading. The combination of high short interest and a small float can cause the price to rise rapidly, if a short squeeze develops.

Looking at the chart below, NILE is starting to trade above a downtrend line, which could be a very bullish development. Also, shares of NILE have been making higher lows since January, another bullish occurrence. Watch for the stock to make a run-up to previous resistance at around $25 a share. If the stock can trade through that level it could be well on its way back to $30 a share.



2. Netflix

Another stock with huge short interest is Netflix (NFLX). Currently, over 40% of the float on NFLX is sold short. Netflix also has a very low float of stock available for trading at only 45 million shares. Shares of NFLX are setting up for some very interesting action. The stock is trading very close to some previous resistance at around $39 to $41 a share. If the stock can break through that level, it could spark a huge short squeeze rally as bears scramble to cover their positions in fear of a move higher.

Now it's possible that NFLX could pullback to around $35 a share before it makes another run towards those previous resistance levels. However, either way, watch for this stock to break out above $41 a share for confirmation that a large short squeeze could be ready to occur.



3. Panera Bread

Shares of Panera Bread (PNRA) are approaching a downtrend line as the stock trades around $49 a share. Over 34% of the float is currently sold short, with only around 27 million shares available for trading. If the stock can break above the downtrend line, it could ignite a big short squeeze rally.

Looking at the chart below, you can see that PNRA is trading above both the 50-day moving average and the 200-day moving average. Also, the volume by price indicator (left side of the chart) is showing a large amount of activity (almost equal buying and selling) has occurred between the prices of $47 and $45 a share. Now that the stock has traded above those prices it could be a strong indication that shares are setting up to move higher.



It’s also worth noting that four out of the past five trading sessions have seen volume come in above the average trading level of 962,000 shares. If PNRA gets into a short squeeze, the stock could run up all the way back to previous resistance levels of $56 a share.

4. USANA

One final name with a gigantic short interest is USANA Health Sciences (USNA). Currently, over 34% of the float for USNA is sold short, plus there are only 5 million shares available for trading. The stock has been in a nasty downtrend since September 2008, falling from $45 a share to current levels of around $20. Looking at the chart below, you can see that USNA has some some previous support around $18.25 a share to $17.72 -- a potential double bottom. If the stock can hold these levels, it could mark a bottom in the near term for the stock and spark a short squeeze rally. With such a small float available for trading, USNA could really run up fast as bears scramble to cover their positions.



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