Shares of Herbalife spiked much higher last night and, despite a partial fade this morning, are up roughly 10% as I write this. Billionaire Carl Icahn disclosed a significant stake in the company, which we know by now is in opposition to the bearish bet that Bill Ackman has made. There is plenty of banter and speculation as to which one of these guys (Icahn also has Dan Loeb on his side) is correct, and which one is about to tarnish his vaunted reputation over a multi-level marketing company.
With this in mind, let’s do a chessNwine-style analysis instead.
First, and I noted several weeks ago, Herbalife remains a broken chart. The top chart below is of the daily timeframe, which shows clearly-declining 50 and 200-day moving averages.Recall that the slope of these major reference points matter most, rather than whether price marginally exceeds them. Here, clearly-decinling 50 and 200-day moving averages give us the presumption of a bearish trend. Furthermore, exuberant, news-driven rallies, which we saw last night and this morning, are the rule during bear trends, not the exception. And they are, historically, to be sold into, not bought, even if they drag on several days.
Now, the second chart below is of the monthly timeframe. And we can see that Herbalife previously bounced precisely off of that former resistance area (light blue line). So, bulls will point to that as major support being defended, and it is all smooth sailing higher from here. That might be a colorable argument, but there is plenty of overhead supply (price memory) to be negotiated if that is even going to happen, as you can see the major topping pattern on that monthly timeframe dating back to 2011.
Next, keep in mind that HLF ran from $6 up to $73 from 2009 through 2012. Indeed, plenty of growth in China and other arguments that fundamentalists are making could easily have already been priced in here. Just as the 2007-2009 bear market pulled in and baked in years of slow growth ahead of us, so too can a bull run price in years of recovery ahead of time.
Finally, there is always the risk that Icahn gets the firm bought out or taken private at a premium, effectively rendering shorts obsolete. The same might be said, though, of any other high profile stock that has ever seen deteriorating price action and suddenly becomes an attractive takeover candidate as such a “cheap” price. In other words, that risk is inherent to Wall Street and short-selling. It should be taken into account with your risk/reward profile as a short, but not used as reason to dismiss, out of hand, the notion of shorting a stock.
In order to see a major reversal of the bearish daily chart trend, the stock likely needs to soundly hold above the $40 level here as the 50 and 200-day moving averages smooth out and eventually torque higher, which would take at least several weeks.
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Has anyone actually ever used a Herbalife Product?