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Key Points

• Pilbara minerals short sale interest has topped 20% for the first time
• Hedge funds are potentially using Pilbara Minerals shares as a proxy for shorting lithium minerals prices
• Pilbara Minerals chart trends imply short sellers are winning the battle

Pilbara Minerals (ASX: PLS) True Believers are a special breed. They're looking past the valley in lithium minerals prices, instead focusing on the company's huge $3 billion cash pile, its low cost of production, and significant production expansion potential. They'll never part with their PLS shares no matter what chart I show them!

In the other corner, you've got the Short-Sellers. Booooo!!! PLS Short-Sellers are mortal enemies of the True Believers. These evil (as far as True Believers are concerned) market manipulators are hell-bent on destroying shareholder value by artificially pushing PLS's share price below its true value.

The battle for Pilbara Minerals' is exactly what I love about markets. Two opposing sides having a strong opinion and slugging it out on the exchange. Demand versus supply, it's the beating heart of the capitalist system.

Today I noticed plenty of chatter on my Twitter about PLS's short-sell percentage, that is the proportion of its free float that is short sold, which has risen above 20% for the first time. Given this turn of events, let's devote a ChartWatch to every Aussie's favourite lithium stock.

Bottom left, top right: Short-sellers pile in

Why do the Short Sellers keep piling in? Can't they see all the benefits of owning Pilbara which are so obvious to True Believers? PLS CEO Dale Henderson has a theory. In comments made at the company's most recent earnings call on the topic, he noted it's not that easy to short lithium minerals prices, and as a result, PLS has become an unfortunate proxy for that trade.

PLS short sellers pile in. Source: Shortman

He's partially right about the general inability to short lithium minerals prices. As far as I know, there's only one major futures contract available for lithium carbonate and lithium hydroxide respectively, and none for spodumene (hey if you know of any – please let me know!). The contracts that do exist are based in China and can often be thinly traded.

Pilbara shares, on the other hand, trade on a recognised stock exchange, are very liquid, and most importantly, are available to short sell.

When will Short Sellers get their comeuppance?

There's so much debate on social media as to when will PLS Short Sellers finally get what's coming to them. That is, when the rest of the market will eventually realise the tremendous value in PLS shares, buy in earnest, and push the price up to finally roast those nasty shorts!

I can say with confidence that there's very little in the current technical for PLS to suggest this scenario is about to occur any time soon. If anything, the balance of technical evidence points to a state of clear excess supply.

Pilbara Minerals shares are trending lower

Pilbara Minerals chart key observations:

• ST/LT Trends: ⬇️/➡️* (* watch negative)

• Price action: Lower peaks and lower troughs

• Candles: Predominantly black

• Points of potential excess supply: 15 Nov high @ $3.82, 26 Oct high @ $3.98, Long term trend ribbon @ $4.20

• Points of potential excess demand: 13 Nov low @ $3.42, 23 Mar low @ $3.35

So, if the combination of these technicals indicates excess supply, and therefore a high probability of a continued fall in the PLS share price, which technical indicators would point to the short sellers getting out and a possible recovery?

Indicators marked with a "*" could signal shorts are finally getting out

First, remember, short sellers get into their trade by selling first and then buying back later. If they can buy back cheaper than what they sold at, they'll make a profit. Like any investor, short sellers don't like to lose money. This would occur if prices rally, and therefore the best cure for PLS's falling share price is a rally.

Preferably one which is big and very fast. This would put the short sellers on the back foot, probably in a losing position, and therefore likely to want to exit their trades by buying PLS shares.

In the chart above, wherever an asterisk appears, I've hand-drawn the price action I would like to see as an indication that short sellers are finally exiting their bearish bets. Nothing speaks of a big shift in the thinking towards a stock like big white candles. Even better, when they're accompanied by substantially high volume.

Both factors would indicate a substantial desperation to buy, and an equally substantial motivation not to sell. Why the desperation? Because market participants can see something important has changed in the fundamentals of the company.