It may be time for speculators to open that door again. Yes, I’m talking about online real estate specialist Opendoor Technologies (NYSE:OPEN). One of the biggest winners during the Covid-19 crisis thanks to its facilitation of generally contactless transactions, OPEN stock once traded hands above $30 a pop during its peak. Today, shares can be had for well under a buck.
After the housing frenzy died down, reality struck Opendoor and the rest of the real estate market. Fundamentally, the rise of interest rates — part of a concerted effort to cool blistering inflation — hurt demand. Further, the cost of living accelerated for average Americans, leaving many struggling to make ends meet. Finally, social normalization meant that contactless services lost much of their cachet.
Subsequently, Opendoor transitioned rather rapidly from disrupter to disrupted. OPEN is now one of the literal penny stocks, an ignominious category within the capital markets.
Despite the dangers, penny stocks carry an allure that continues to entice investors. Few other sectors offer the chance to see robust gains within a compressed time period. Both the timing and the circumstances have to align, which is always difficult to predict.
Having said that, OPEN stock is awfully compelling as a speculative idea. First, its short interest stands at 14.2% of its float. Ordinarily, that’s not a great sign. However, if OPEN sees positive price action, the bears would find themselves on the wrong end of the barrel. In such a situation, they have an incentive to close out their positions.
However, a short position is closed by buying, not selling. Therefore, an upward panic may ensue for OPEN stock, a phenomenon known as a short squeeze. Given the relative popularity of Opendoor among retail traders, a squeeze is a non-zero possibility.
One month ago, I identified OPEN stock as a potential upside prospect. Primarily, I relied on the quantitative signals provided by market breadth data; that is, the sequence and probabilities associated with accumulation (positive sessions) and distribution (negative sessions).
As a baseline, the chance that a long position will be profitable in OPEN stock on any given week is only 44.19%. Functionally, this figure is calculated by using a rise-over-run-style equation: take the number of positive weeks divided by the total number of weeks in the dataset. By default, then, OPEN suffers from a negative bias.
However, it would be incorrect to assume that this negative bias applies to all sentiment regimes. Certain sentiment cycles may generate probabilities that differ significantly from the baseline.
In the past two months, OPEN stock printed a “2-8-D” sequence: two up weeks, eight down weeks, with a net negative trajectory across the 10-week period. Notably, in 83.33% of cases, the following week’s price action results in upside, with a median return of 2.9%.
Should the implications of the 2-8-D sequence play out as projected, OPEN stock could reach 71 cents within a week or two. Should the bulls continue to maintain control, a push toward 78 cents to 80 cents would not be out of the question.
Indeed, the 2-8 sequence played out beautifully when it flashed last month. A repeat performance could allow speculators to extract quick alpha once again.
