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The management at Research In Motion (RIMM) disappointed this past week as it appears they failed to launch the long-awaited buyback. Who can blame them? It was a week of dour headlines filled with yet more European sovereign debt fears. Even RIMM’s mega-millions may have been wiped clean in a flash if the macro-headlines turned deeply south. The week had its brief moments of excitement, but sellers were quite effective in pushing back every single attempted rally in the stock. RIMM ended the week down 5.0% while the NASDAQ declined 2.5%.

Speaking of sellers, short interest in RIMM dropped 8% at the end of June. It is starting to look like the level of short interest is stabilizing again around current levels. Clearly, sellers are not concerned about RIMM’s ability to prop up its stock.

click to enlarge images

Short interest in RIMM appears to be stabilizing after a sharp two month run

Short interest in RIMM appears to be stabilizing after a sharp two month run

Source: NASDAQ.com

Now that this first week of the buyback’s window has come and gone with no satisfaction, I need to review the trading scenario going forward.

Last week, I presented the following scenarios for playing the planned share repurchase:

  1. Scenario #1: Management starts buying right away on Monday to make a big statement of confidence. Result: RIMM opened the week strongly, but the general market was experiencing a strong sell-off. So, no surprise that RIMM reversed its brief gains and ended the day with a 3.2% loss and amidst no sign of any buyback activity.
  2. Scenario #2: Management waits for sellers to push the stock back and then return later in the day Monday or on Tuesday to start the buyback, thus, creating a convincing floor for the stock. Result: RIMM managed a small gain on Tuesday while the general market continued its sell-off. Volume was never strong enough to suggest buyback activity. (Of course, the company may be trickling out its purchases, but, to me, such a strategy makes little sense).
  3. Scenario #3: Traders wait for the stock to close at a post-earnings high above $30.30 for confirmation of renewed buying interest in the stock. Result: RIMM got nowhere close to this scenario. If you have not already placed your bets (I earlier suggested a Sept 30/35 call spread to give enough time for reaching the first upside target of $35), it makes sense to just wait for this confirmation before making a move.

Last time, I also mentioned that RIMM would really benefit by rolling out some good news along with purchasing shares. After reviewing the above scenarios, I realized that there is a “worst case” scenario that could be just as likely as any other scenario. RIMM may have even more bad news coming down the pipe. If so, management would be wise to wait to start buying stock until sellers react by taking the stock down even lower. Traders can either anticipate the company’s reaction by buying into the selling or simply wait for the stock to close above the day’s losses.

Whatever scenario awaits RIMM, the chart suggests to me that a big move is brewing. The churn in a tight trading range for the past month has generated pent-up energy translating into a “Bollinger Squeeze.” This pattern is another way of saying that long periods of low volatility lead to a period (typically a burst) of high volatility.

The chart below shows how the Bollinger Bands are rapidly closing down on the price action. Resolution of such patterns usually occurs within days. Since RIMM is suffering from a severe 4-month downtrend, the technical bias points to a downward resolution of the Bollinger Squeeze. I, of course, will greatly prefer an upside resolution, and I am only holding out for such a move given the special case of the imminent share buyback. (For another recent example of the Bollinger Squeeze in action, see my piece on Molycorp (MCP): “Chart Review: Molycorp Update – Pressure Building.” Three days after that post, MCP dropped 7% in one day and sold off for another 16% before finding a bottom at its 200-day moving average.)

(As usual, you can follow my trades in RIMM on my twitter feed using the #120trade hashtag along with $RIMM as the stock identifier).

RIMM poised for a big move in the next few days

RIMM poised for a big move in the next few days

Chart created using TeleChart

Source: Boring Week Waiting for RIM's Buyback but a Big Move Is Brewing