Ted, you are right that when a stock falls a lot, short sellers will cover, and the short interest will diminish.
It's still possible that the stock might decline more, though. You have to evaluate the fundamentals. If the company's situation hasn't gotten any worse, it would make sense to cover. But if things just keep going from bad to worse, why take profits prematurely? Consider for example SOLV, which eventually declared bankruptcy. It would have been ideal to stay short, despite an ever diminishing stock price, until the co. was bankrupt and the stock went to the pink sheets, assuming that you understood the fundamentals (or lack thereof) of the co.
That's the key issue, I think. Understanding the fundamentals, and putting a value for the stock on those fundamentals, rather than just relying on technical indicators like how much the stock has fallen. |
