Time to buy again?

Over the last few years there have been a number of times when the EWC price has been pushed down to levels that have represented very good buying (see previous posts).

In my view this is happening again.

Previous episodes have a few things in common: short activity has dominated trading volumes, commentary has increasingly turned negative, and most times an event has emerged that has been linked to share supply in the future i.e. EWC has been taken out of an index and the shorters exploited this.

This time I haven’t found any stock likely to be made available from an index exclusion.

Shorter activity has certainly increased dramatically moving from 3 mill short at the end of January 2018 to approximately 20 million short now. This occurred after a long period of continual short covering so the change in direction was very abrupt and interesting.

Of particular interest is the acceleration of shorting as the price started to fall below 25 cents.
Up to this point shorters were shorting an average of 302,000 per day which represented approximately 60% of daily volume. This gave an average short price of 30 cents meaning if they could cover below 30 they would make money.

Following the fall through 25 cents the short activity accelerated dramatically increasing to an average of 775,000 per day representing over 90% of the daily activity. For a period of 10 days the short activity was virtually 100 % of daily volume. I don’t think I have ever seen such aggressive behaviour from shorters. This activity has decreased the breakeven to 26 cents meaning buying back the 17 million (20 minus 3) below 26c would make a profit and above 26 cents a loss. Note that this does not take borrowing costs into account.

Interestingly these 10 days where the shorts were very close to 100% of the daily volume raises interesting questions around satisfying ASX rules.

The ASX rules 19.3.3 and 19.3.7 state the following, ‘A Short Sale ……… may only be made if the price is not lower than the price at which the last reported sale ….’ It then goes on to say that ‘….must not Short Sale ……if the Trading Participant is a party to the last reported sale….’.
How can doing virtually 100% of the volume satisfy these rules? Either the data reported is wrong or the shorters are breaking these rules – both are a problem. It is no wonder, in the recent release, EWC is questioning this activity.

An additional point I have noted in previous posts, is that unusual short reporting also seems to occur close to where the shorters start changing their view. For example an increase in the number of days where the change is short from one day to the next is impossible when compared to actual daily volume. This happened on 10, 11,16,17,19 and 21 April and was during a period where the share price was hit very aggressively. In addition, current activity in the market does seem to have changed a little with the most recent daily shorts being a significantly lower percentage of daily volume. Another change is the volume on bid/offer. During the period where the price is being aggressively pushed down, the offer side is often very thin and the bid side is continuously hit. However when shorters are covering the offer side is often quite heavy. This pattern is clearest when the short volume dominates trades. Put another way, the shorters are really controlling market prices. This is likely to be done through robots which have been selected with algorithms that ensure volume is being done at prices that suits the shorters. In my view this has also just recently started occurring again.

Turning to the negativity of commentary. The number of followers has clearly gone down and so the negative commentary doesn’t seem to be as severe as before. However I note that one poster Skeoch, who appears to be a shorter or is related to the shorters, has reappeared again and posted repeatedly over a few days.

I think the boxes are ticked for the next turning point.

Shorters are good at what they do and will often report confusing trades particularly when they are trying to mask their change from being buyer to seller or vice versa. However, over time this confusing behaviour can be unravelled. They may try to knock the price lower. This will enable better buying, a bigger short and a lower break even for the shorters.

If no supply of stock appears from either an exit from an index (I can’t find it) or an issue (which I believe is unlikely until at least the 400 MW is connected and given SE converted his notes at 50 cents), then covering this short will not be easy.

Time to start playing again.