Wednesday, June 06, 2007

"Short Float" Breakout Setup: ILMN

ILMN made a 4 % gain today over established resistance. However, that's not what put it on my watchlist. Stocks in a downtrend do not usually make the cut. What makes this stock special is that it is a low float stock with a high short interest ratio.

The stock's float is a little over 5 million. To put this in perspective, AMZN and HTZ both have over 30 million floats. What this tells you is, if there is strong buying interest, it will be easy for ILMN to make a parabolic move.

The short interest ratio is 12.6 percent. That puts it's short interest in top 10 percent of today's top 40 breakout stocks. Not bad. If there is buying interest and price starts to move up, there is a good probability that we will see some short covering. This could make what would have been a small gain after the breakout into a parabolic move.

Ideally, I like to use this setup for stocks that are not in a downtrend. For example, take a look at IOC. This one was a perfect setup, but now is a little too far from it's breakout point. However, it works for stocks that are reversing from downtrends as well, you just must play it more cautiously.

To sum it up, here is what I like about ILMN:

A. Short Interest High
B. Float Low
C. Breakout
D. Over Resistance

Note that their are a few resistance points to cross, with the 200 day moving average at $35.81 and the gap down at 38-40. I will not enter unless the 200 day moving average is crossed, or we get a low volume pullback to the breakout point. In either case, I will use a tight stop upon entry. I tend to play it "tighter" when a stock is trying to break a downtrend.

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