There is a 20% outstanding short interest in shares of Party City Holdco, a speciality retailer that provides party supplies. This is usually not a good fundamental sign. Short sellers are very often right about a stock.
But when the stock has been under consolidation for a while and looks like it is poised to break out of a technical pattern, then a large short interest can be a good thing for traders. It can power the classic short covering rally, when weak holders rush to cover their short positions and consequently the stock rallies.
On the Party City weekly chart the stock can be seen breaking above a long term downtrend line that marked the 2017 and 2018 highs. Shares then began trading in a horizontal channel pattern delineated by resistance in the $16.25 area and support at $14.00, just above the 40 week moving average.
The stochastic oscillator is moving higher reflecting an increase in positive momentum, but more importantly are the money flow readings. These indicate an increase in investor interest in the stock this year and accumulation.
On the daily chart it is clear that Party City is in the process of breaking out. The long short-squeeze trade is a speculative one designed for a quick profit or a quick loss. Protecting capital is the prime directive.
(Note to readers: please notice that no cheesy “party” references were used in this copy. It wasn’t easy.)