While solar technology company Enphase Energy Inc ENPH may be one of the most actively traded stocks, it's for the wrong reason. Seemingly on no news, ENPH stock crumbled more than 8% in the Thursday afternoon session, which has turned a winning week into a losing one, down about 2% in the trailing five days. In the past month, ENPH has hemorrhaged more than 25%, effectively putting the underlying entity in crisis mode.

True, Enphase didn't necessarily do itself any favors in its most recent financial disclosure last month. On paper, the second-quarter results were strong. Earnings per share landed at 69 cents, above Wall Street analysts' consensus view of 63 cents. The figure also exceeded the year-ago quarter's earnings of 43 cents per share. On the top line, Enphase generated $363.15 million, above the consensus target of $359.26 million. One year ago, it rang up $303.46 million in revenue.

Unfortunately, weak third-quarter guidance appeared to have doomed ENPH stock. Management stated that it anticipates revenue to reach between $330 million and $370 million, with the midpoint at $350 million. However, analysts pegged the consensus target at $363.25 million. Further, the company's gross margin guidance included about three to five percentage points of new tariff impacts, which may have weighed on investor sentiment.

Still, the results came out in July, which is plenty of time for market digestion. Digging around, it appears the culprit is rising short interest. As of the last settlement date of July 31, the short interest stood at 30.69% of the float, which is wildly high. It's possible that the bears have begun attacking ENPH stock right now, given that there may have been subtle clues regarding bearish intent in the options market yesterday.

Either way, I would argue that the downfall is an exogenous factor. Just prior to the implosion, ENPH stock was on a winning streak relative to Monday's open. Still, for adventurous traders, this fallout could represent a high-risk, high-reward opportunity.

Essentially, ENPH stock could be due for a short squeeze, a dynamic where a heavily targeted security shoots upward as panicked bearish traders cover their positions (by buying to close), naturally sparking a positive feedback loop. Plus, it appears that prior short squeezes have at least temporarily resolved to the upside.

While betting on a potential short squeeze materializing can be an effective means of extracting quick profits, it's also wildly risky. How the market responds is unpredictable in such dynamic and kinetic circumstances. After all, if and when the panic sets in, the security could skyrocket in a blink of an eye.

Adding to the perplexity is that elevated short interest metrics don't tell you when the sentiment reversal might take place nor how high of a move a contrarian trader may expect. Even with technical analysis, there's no objective principle that defines the probability of a security moving higher. As such, the best approach may be discrete-event analysis.

Rather than viewing share prices as a collection of scalar signals, I'm going to treat them as discrete objects. Conceptually, this is an easy exercise because the core objective truth in the equities sector is that, at the end of the day, the market is either a net buyer or a net seller. With discrete-event analysis, we are being epistemologically consistent by assigning discrete labels and discrete objects.

For example, in the trailing 10 weeks (not inclusive of today's arguably exogenous factor), the market voted to buy ENPH stock six times and sell four times. During this period, ENPH incurred a downward trajectory. For brevity, we can label this sequence as 6-4-D.

It's a rare sequence, having materialized only 13 times on a rolling basis since January 2019. Further, it's an oddity because the balance of accumulative sessions outweighs distributive, yet ENPH's trajectory is negative. However, this sets the course for a potentially intriguing reversal.

As a baseline, the chance that a long position in ENPH stock will rise on any given week is 52.89%, a modest upward bias. Therefore, any trading setup must be able to beat this null hypothesis (the assumption of no mispricing); otherwise, there's simply no point.

Fortunately, the alternative hypothesis in the form of the 6-4-D sequence features a next-week upside probability of 69.23%, which is significantly higher than the null. Further, the median return stands at 8.43%. If the bulls can maintain control for a second week, ENPH stock could potentially rise by another 4.98%.

For the most aggressive trader, the 34/35 bull call spread expiring Sep. 5 could be intriguing. This transaction involves buying the $34 call and simultaneously selling the $35 call, for a net debit paid of $39 (the most that can be lost in the trade). Should ENPH stock rise through the short strike price ($35) at expiration, the maximum profit is $61, a payout of over 156%.

To be sure, based on the current share price and the projected upside pathway, ENPH could pop over $36. There are some debit call spreads with a second leg price of $36 featuring payouts over 200%, such as the 34/36 bull spread. However, I believe the $35 short leg provides adequate reward for a higher probabilistic trade.

For me, the real question comes down to the statistical viability of the 6-4-D sequence. Running a one-tailed binomial test on the sequence reveals a p-value of 0.1842, indicating that there's an 18.42% chance that the implications of the signal could materialize randomly as opposed to intentionally.

While the metric is a bit more elevated than I usually like, considering the context of the stock market's open and entropic nature, you can make the argument that the signal is empirically intriguing. Besides, all we're looking for is a brief asymmetric edge. If you don't mind taking risks, ENPH stock is a tempting proposition.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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