E-Trade Financial Corp (ETFC) is showing some interesting signs here. Actually, to be more specific, I should say it is a lack of something that has my eye. That "something" is an absence of large moves. The stock was hit hard in the second half of 2007 and finally found a bottom in January of this year. Since then, it has traded sideways. But before I get to the "absence" I want to offer a little background.

Shortly after the bottom was hit, we tracked the stock as it bounced into overhead resistance near 6. While that rally didn't even put a dent into the decline, it did represent a gain of 50% in the course of about a week's time. The shares failed to overtake that overhead hurdle and, eventually, staged a rejection.

During the overall decline and subsequent basing period, short interest has been growing. The chart to the right shows the increase. According to data from our Quantified Analysis department, short interest now stands at just over 20% of the stock's float. Heavy short interest like this can lead to a short squeeze, but for that to happen we need a catalyst to spark the buying. With that in mind, let's turn to the daily chart.

Chart Courtesy of Thomson Financial

Here we see the resistance zone discussed a few months ago. What caught my eye here is the near "flat-line" action since March. The green line, which measures short-term historical volatility, illustrates the relative absence of large moves I mentioned above. I have often found that a contraction in volatility can be a sign that "pressure" is building. Unfortunately, a contraction doesn't suggest which way a stock will break.

If the stock is going to break to the upside and challenge the overhead resistance, it will need to get through a fairly heavily amount of overhead calls. The May 4 Strike is home to over 27,000 calls.

Overall, we have a stock in a volatility contraction phase with a heavy level of short interest. That could set the stage for a pop above the front-month calls but we still need a catalyst. Keep an eye on the charts and headlines.