Following The Hedge Funds Short: Nanoco, Tungsten, GW Pharma?

Although in theory it makes no difference to a technical analyst whether they call a stock or market long or short – the method is fine for both directions – I have to confess I am usually biased to the upside. This doesn’t necessarily mean that I always look on the bright side of a situation, but rather that when I am picking out what are hopefully the better opportunities in the market, they will be those which will hopefully rise.

This is of course a relatively easy philosophy to go with in the wake of the latest new record high for the FTSE 100. However, the bullish perspective is also one which is mindful of the position of most private investors, who are long in their portfolios and via pension funds. The temptation to shock or scare them with horrific downside targets is one which is resisted, only if this truly looks to be the case. In fact, in this article we are following up on a recent piece where I highlighted the short positions of hedge funds as opposed to bloggers/those attempting to drum up traffic/views.

Having said all that, today’s selection of stocks of possible technical bear situations do appear to be highly bearish from a chart pattern perspective. First up is Nanoco (NANO) where post January we have the infamous “Angry Cat” double top pattern which worked its magic last year by more than halving the share price of Quindell (QPP) – a company which is still high on the list of the most shorted stocks by hedge funds. So far it has not done the same for Nanoco in such spectacular fashion. But it should be noted that at least while there is no weekly close back above the 200 day moving average at 110p we are in a very negative setup. A retest of the sub 90p January support looks to be the minimum on offer, even if the stock manages to rehabilitate itself after that.

With shares of Tungsten Corporation (TUNG) it can be seen how in theory one could have given the benefit of the doubt to the recovery argument as recently as the beginning of this week. However, the brutal break of the initial February support around 200p has unleashed the power of the post May head & shoulders pattern, one that promised a measured move to the downside of as much as 150p from the neckline zone of 250p. This gives us a target area of as low as 100p while there is no break back above 200p. I would venture to suggest that most observers of this situation would not be expecting a rebound back above 200p any time soon.

What is perhaps most interesting about the exercise of following the hedge funds’ shorting activity is the way that while one may mostly agree or at least see where they are coming from on a technical or fundamental basis, now and again the logic is not so apparent. In the case of GW Pharma (GWP) it can be seen that it is still possible to draw a rising trend channel on the daily chart from April last year. The floor of the channel currently runs level with the 50 day moving average at 406p. From a technical perspective it can be said that only a break of the 50 day line/2014 support line would be a clear trend break/shorting opportunity on a momentum basis. Indeed, above the 50 day line the notional 2014 resistance line projection is as high as 700p.