Chart of the week: A short squeeze could trigger rally

This data caused an eyebrow-raising incident for our technical analyst that only appears when he spots an instant trading opportunity.  

Uber is in the slow lane – can it get on track?

I believe most agree that Uber Technologies' (NYSE:UBER) IPO was an unmitigated flop last month. Last year, many merchant banks gave it a valuation of $120 billion but, at launch, the shares opened at the $45 issue price, valuing it at only $69 billion.  Ouch!

And from then on it got worse, with wave upon wave of short selling driving it to a low of $36.  How do I know it was a bear raid?  Simply because the reported short interest as measured by the number of shares out on loan has reached the staggering height of 70% of outstanding shares!  How's that for a vote of no confidence in the company (which already loses about £1 billion a year)?

The consensus seems to be that it will never make a profit – and the shares will sink.  But will it?

• Uber IPO: Our view and a guide to buying the sharesLatest Uber stock price forecast

When I read the short interest data, I immediately had an eyebrow-raising incident that only appears when I spot an instant trading opportunity. Sometimes, a trade simply stares out at me instantly.

So here is the short chart history on the 2-hour scale:

Source: interactive investor  Past performance is not a guide to future performance

From the $36 low, the shares staged a normal rebound (bargain-hunting and short covering?), then fell back in late May, but stopped at the precise Fibonacci 62% retrace of the rebound wave.  Remember, I consider the Fibonacci 62% retrace as a ‘normal' correction.

And sure enough, the shares moved higher off there to approach the $45 issue price. And that is where some ‘stale' longs escaped their losses at around break-even – and I am sure breathed a sigh of relief.

Then the dip carried to another Fibonacci 62% retrace of the previous up wave at $41.80 in another superb display of Mr Fibonacci working overtime.

And that is where a low-risk long trade was indicated, with a protective sell stop-loss just below $41.80, just in case the market wanted to dip a little further to perhaps the next Fibonacci level at 76%.

But this is where it starts to get interesting.  Recall the huge short interest I mentioned above? Imagine the scene if the shares can push above the $45 issue price.  In that case an army of shorts will be nervously eyeing their statements as they observe their losses growing – and wondering if they should cover.

That is how a short squeeze develops that can rocket the market sharply higher from this source alone.  It would take perhaps a favourable statement from the company such as growing revenue, or lower costs, or involvement with another sector.  Or it may start with no obvious catalyst at all.

Of course, that may not happen at all, but I have a roadmap for the shares if it did – and a close stop in case the bears remain in control.  On a potential reward/risk basis, this strikes me as a very good bet.

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John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.