Influential short seller Bill Ackman’s assault on the share price of Herbalife (NYSE:HLF) was interrupted last week.  Dan Loeb, another influential hedge fund manager came out to defend the stock and disclosed an 8.3% stake in the company.  Loeb stated that HLF shares are worth at least $55-$68, and possibly “well above” that.

The sell-off

Perhaps Ackman’s disdain for the company was instigated by David Einhorn’s inquiries last spring.   Back in May of 2012, Einhorn challenged the company for details of its distributor network in a post-earnings conference call.  As a result of this inquiry, the shares retreated sharply from its all time high of $73 to $42.15, then rebounded to just over $55.  At that time, several Wall Street analysts reiterated their buy recommendations.  In addition, the company initiated a $428 million stock buyback.  These actions put in a temporary bottom in the stock until Ackman revealed his large short position in the issue on December 19th.

Short Squeeze

After bottoming at $24.24 on December 24th, the shares consolidated for a few days before drifting higher.  Loeb’s disclosure of his long stake propelled the issue to $41.90 on Wednesday, and to $42.99 on Thursday, before settling at $40.02 on Friday.  But where does HLF go from here?

For now, shorts will be leaning heavily on the $42.99 (Thursday’s high) to $43.20 level (high on the day when Ackman announced his bet against the company).

This area coincides with the area of consolidation in mid-December before the shares plummeted.  Therefore, all the bottom-pickers on the first leg down have an opportunity for a scratch at the current price, while the bottom-pickers on the second leg down are sitting on some nice profits.  On the other hand, the “Johnny come lately” shorts are underwater and are banking on the Federal regulators to support Ackman’s accusations.

Unfortunately, for these squirming shorts this process could takes months and even years to come to fruition.  Until the government weighs in on the issue, declines will be stacked with bids as shorts attempt to exit their trades.  More importantly, HLF is on a remarkable streak of 12 consecutive higher lows since bottoming at $24.24.  Obviously, this is an unsustainable technical pattern and once the highest low is breached, shorter-term long players may head for the exits.

For those agreeing with Mr. Loeb’s assessment of the company, a rally to and close above the next major resistance area ($48.90) is needed.  This level represents a double top back in late November, before Ackman’s stake became public knowledge.  Also, this is slightly above the 50% retracement of the prolonged swoon from April to December.

So what can move the stock to the aforementioned levels if there is no government intervention?  Earnings, which are to be released on February 18th.  In my opinion, Mr. Ackman is relying more on future earnings disappointments than a government shutdown of the company.  If HLF is the alleged Ponzi scheme he suggests, eventually earnings will suffer as participants (distributors of the product) are eliminated.  And if there is one thing this company can ill-afford, it is more bad news.

For those attempting to trade this beast, I suggest having your entry, exit and stop points pre-determined.  The bulls are still in control, but keep one thing in mind, short squeezes do not last forever.