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Short Interest Surges Higher on Downtrending Eldorado Gold

Ahead of earnings, shorts could be hedging their bets on EGO

by 4/25/2012 2:35:12 PM
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Eldorado Gold Corporation (EGO - 13.86) has been a laggard on the charts recently, pulling back roughly 3% in 2012, and lopping off more than 24% over the past 52 weeks. In fact, the stock has underperformed the broader S&P 500 Index (SPX) by nearly 15% during the past three months. Currently the shares are up more than 4.6% today, but are staring up at their 10-week and 20-week moving averages, and the $14-$15 region -- the latter of which has contained all but two weekly closes since mid-December.


Despite EGO's overall downtrend, the options arena appears to be optimistic toward the stock. During the past 10 days, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 11.56 calls for every put on EGO. This ratio arrives in the 70th percentile of its annual range, signaling that speculators on these exchanges have bought calls over puts at a faster-than-usual pace over the past couple of weeks.

Short interest on the equity skyrocketed 78.3% during the most recent reporting period, suggesting that the acceleration in call buying could be related to hedging activity by the shorts. However, the bearish bandwagon is far from crowded, as it would take just over one session for these pessimistic positions to unwind, at EGO's average pace of trading.

Should EGO's poor price action persist, the upbeat analysts could rethink their positions on the gold mining issue. The average 12-month price target sits at $20.83, which represents a nearly 56.5% premium to Tuesday's settlement of $13.31. Plus, 92% of the brokerage bunch consider EGO to be worthy of a "buy" or better endorsements.

Also, Eldorado Gold is slated to unveil its first-quarter results after the close next Thursday, May 3. EGO has fallen short of Wall Street's profit expectations in all of its last four earnings events.

With multiple layers of resistance looming overhead, a capitulation by bullish analysts or traders could make matters worse for EGO -- especially if the company turns in another earnings miss next week.


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