On paper, Rivian Automotive (RIVN) should rank among the top-performing publicly traded innovators. Specializing in electric vehicles, the company naturally butts heads with sector juggernaut Tesla (TSLA). However, with its vehicles becoming so synonymous with advanced mobility that it arguably blends anonymously into the suburban background, Rivian offers a much-needed breath of fresh air.

Here’s the thing, though. RIVN stock simply hasn’t been a great investment. Sure, in the past 52 weeks, the equity gained over 25%, which is a solid return. However, on a year-to-date basis, RIVN has only moved up half-a-percent above parity. This demonstrates how incredibly choppy trading has been — timing, it would appear, is just as important as the fundamentals.

To be sure, there is the point to be made regarding Rivian’s high short interest. According to Fintel, the latest estimate has the short interest reaching 20.05% while the underlying ratio comes in at 4.16 days to cover. Essentially, it would take almost a full business week for the bears to fully unwind their short exposure. In the meantime, RIVN stock could potentially rocket higher.

Since short positions are inherently credit-based transactions, bearish traders must always consider tail risk: the threat of an ever-rising obligatory payment as the underwritten risk gets realized to the extreme ends of the distribution. Closing a short position requires buy-to-close transactions (rather than sell-to-close), which can cause an upward panic known as a short squeeze.

Still, the relationship between short interest and the RIVN stock price has been an inverse one. Last month, the two metrics shared a correlation coefficient of -72.94%. Essentially, as the bears piled against Rivian, the equity has generally lost value.

Now, there’s always the risk that heavily shorted securities can bounce higher — and that might be the case for RIVN stock, at least temporarily.

Quantitatively, RIVN in the trailing 10 weeks has printed a 6-4-U sequence: six up weeks, four down weeks, with an overall upward trajectory. Per past analogs, there’s about a 38% to 41% chance that in the next two weeks, RIVN shoots higher.

However, the general trajectory tends to be negative following the 6-4-U sequence. Adding to the overall skepticism is that RIVN stock appears to be charting a head-and-shoulders pattern, which typically carries bearish implications.

Sure, it’s a heuristic — but when combined with empirical data, the argument appears more convincing. Again, there could be an upside opportunity for RIVN stock. It’s just that in similar circumstances, the upside has been short-lived.

— Josh Enomoto

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Source: Money Morning