I think that MercadoLibre Inc (MELI) is an interesting situation. Shares of this Latin American online auctioneer put in a strong performance in the second half of 2007 but have struggled for much of this year. However, it looks like a potential short-term bottom could be developing and short interest could help fuel the rally. Here is what I am looking at.

Chart Courtesy of Thomson Financial

This daily chart highlights the recent action. What is of interest to me is the low hit last month, which marked an end to the decline that began in May. The shares bounced from that low and rallied into short-term resistance near 38. We then have a quick pullback.

What I am watching here is to see if the current pullback can form a higher low, relative to the July bottom. If we do see that, the next important step would be for the stock to overtake the recent short-term peak near 38. To understand the importance of these two events, it might help to look at the weekly chart.

Chart Courtesy of Thomson Financial

Here we see long-term support just below 30 (grey zone) and a series of lower highs (red trendline). A bounce here that overtakes the recent mini-peak would mark a break of the lower-highs pattern and suggest a turnaround is underway. I think that is a more constructive situation than what we had earlier in the year.

While it is still too early to say that the turnaround is in place, I wanted to get the idea on your radar screen because of the way short interest has been building.

The total number of shares sold short has nearly doubled since mid-May.

According to data collected by our Quantified Analysis group, 23% of the stock's float is now sold short.

If we do start seeing some signs of a turnaround, this could spur some of the shorts to cover, which would add buying demand to the situation.