WallStreetBets and Triangles

WallStreetBets and Triangles - Diamond Hands don't mean this time is different!

Triangles are linked to volatility, so where would a good place to look—cult stocks, where sentiment explodes without any fundamental or technical reason at all. Until recently, the obvious place to look was the cult of Bitcoin, which recently entered its second period of crazy volatility, and sure enough there are triangles everywhere, all of which follow the main theory except the huge 2017 move, where the degree of overboughtness (the speed of the move) was enough to turn a bullish symmetrical triangle bearish.

If the current triangle plays out like 2017, we would expect a low of around $23k before the next move up. It’s strange how there is not the noise around Bitcoin today as there was in 2017, despite it being around double the value of that time.

The current cult is the reddit r/wallstreetbets, which is certainly doomed to fail, sadly leaving a sour view of trading to thousands of new people in the market. And make a few dozen people who timed it right, almost certainly professionals, very happy!

Unlike Bitcoin, shares have a set of fundamental rules, and if you’re going to short-squeeze something, you wouldn’t pick two firms who are trying to physically sell (games and movies) something which can be bought instantly online. Unlike general apparel and housewares, which still have a ‘touch and feel’ aspect, there are no firms growing in the physical retailing of media.

GME

 

The primary target GME ‘game’ is now ‘over’ as the price reverted to mean this week, but is an instructive example. Overall the chart is a near-perfect Rodrigue Bubble, but the squeeze has three clear triangles. The first and third were followed by a series of days of constant movement, which produces a weekly candle with virtually no tail, a marubozu, the ultimate one-way sentiment candle. Note how as the pattern completes, the move up starts again.

AMC

 The second loss-making target AMC, has not finished, and the price stands at writing at $7.25, still 45% over the pre-raid price of $5.00. The WSB game on this one has been more subtle, and the pattern has been a single, slower, descending triangle. The pattern should play out with a final, fast, marubozu-type drop to the $5 mean (following the lower hypotenuse) however the upper part of triangle allows for a squeeze back up to $12.50 (but no more).

The WSB community has also been flirting with other stocks, BBBY (a profitable specialty retailer), NOK and BB (the losers in the smartphone wars, but still alive and profitable), and now loss making REIT, mall-owner MAC. These are all of course, also institutionally shorted.

BBBY

 

The squeeze was unusual as it came in two waves, resulting in a fade of a bullish ascending triangle, the reverse of the norm, followed by a conventional symmetrical triangle (pennant) which did work as expected. It has now reverted to mean, touching the pre-squeeze high of $24.40, and again there is an approximate Rodrigue pattern (with a strongly extended beartrap) suggesting it is now a reasonable candidate to buy, and at a P/E of 22.9 not particularly expensive. Although physical store expansion is very unlikely, their online proposition, with an Amazon Prime-style 20% off all orders for $29/yr is as good as anyone else. Over half of online shopping is not Amazon. There were three chances to exit this squeeze at a profit, so people may try again, especially if there is a rally through the $30 light resistance point.

The point is that this company, unlike GME and AMC is fundamentally okay, and if it doesn't squeeze again, you may still not lose money.

NOK

 

A minor WSB target which played out as a single symmetrical pennant, which followed the 100% drop ‘rule’ perfectly. The stock has nearly fulfilled the drop and returned to mean ($4.20), leaving the way for normal growth. Although 2020 was a bad year, their guidance is positive. We could perhaps see another run on this one, which would also be in line with the bullish descending wedge which followed the gap drop. Here are the estimate forward financials, and as you can see they have been in trouble before. NOK of course used to own the cellphone world, and holds many patents, so a possibly takeover target.

BB

This Canadian firm is other ‘loser’ in the smartphone wars is more interesting as it doesn’t seem to be over yet. There was a strong unexplained 66% move up on Dec 1. The volume faded immediately as did the volatility, and half that gain was lost and then recovered. The real action took off on 25 Jan and in a day formed a symmetrical pennant, and then accelerated again, to even more, to add more than 100% to the pennant height, although volume came off slightly before the top. On the way down a bearish descending triangle is still playing out. The price dropped but Friday’s action has broken above the triangle.

So there is further to go here. The company is profitable, but does not really deserve its current PE of 80, but there is no reason that it may not go back to the $15 area before it eventually returns to the pre-December $6 price, a necessary move before a long-term rise. Selling the current $13 with, say, a $3 stop is not for the faint-hearted but should pay off in the end. Again, like NOK, they have IP which may make them a takeover target.

MAC

This mall-owning REIT is the latest WSB target, and another one which is following the Rodrigue pattern well. The run started on Jan 2, from a $10.60 base, and a late 2020 high of $12.50 to $15.00, at which point the short squeeze took off. This collapsed in a descending triangle, and the expected further drop, at 100% projects the pre-squeeze $10.60 point, and so is a good short at $13, although once again it has recovered today (5 Feb). The forward guidance indicates even further decline, and we are already in the middle of the 2020 range, so best avoided as it could range $10.50 to $15.00 for a long time.

SLV

  

There was a brief attempt to squeeze Silver amongst the WSB group, but it was very quickly realised that futures open interest is far too large for a retail activist group to take on and a brief history lesson on Nelson Bunker Hunt made the activists realise this was not a stock (or a ‘stonk’ as they call it) and the activism was quickly withdrawn. Neverthless, the rally produced a couple of triangles on the way up, and pushed silver into the next level, previous resistance at $26 becoming support (Darvas theory), above which is it likely to remain. $30 holders will probably break even if they hold long enough, and the current chart suggests a buy, although only to $28 in the near-term, again following Darvas.

Note particularly how silver volume hardly moved during the 25% price move up and down, a sure sign that your plan is going nowhere.

SUMMARY

The key point about this activism, the proletariat WSB ‘retards’ (echoes of Hillary’s deplorables) is that they want to break a heavily shorted stock by squeezing out bourgeoise hedge funds and then selling at the accelerated top. Given the right stock—it would have to be a fairly low public issue, market cap and liquidity choice, and a very narrow range of funds holding the shorts, it’s possible that the plan could work, although very unlikely because the activists are not really homogenous. Playing this game, unlike being QAnon or StopTheSteal, can cost you a lot of money, meaning that the mildly committed (which is the majority) will jump ship causing the squeeze to fail. This is especially true if they are in profit and see the profit shrinking rapidly. For various psychological reasons, once the position is red, people are more likely to hold.

Open interest in options and futures greatly magnifies the amount of stock available, and when you see these catastrophic falls, the only counterparties in town are market makers, who you can never beat.

Two things to remember: