Hi folks,
Recently I shared a potential short squeeze candidate and setup, $MARA on my Trader Stewie twitter feed. I received a lot of great feedback and questions about the trade and setup so I figured this would be a great place to review how to spot and trade these potential short squeeze setups and make them your very own!
Here was the initial tweet:
Let’s start by covering the basics so we can understand the concept of what makes up a short squeeze!
What is short selling?
To short sell a trader or investor “borrows” shares and sells in on the open market. Planning to buy back (or cover) the short position later for a profit.
A short seller hopes the price of the stock goes down - the short side of the trade. Where as on the long side of the trade, the trader hopes the prices goes up. (Two sides to every trade)
What is a short squeeze?
A short squeeze, is a rapid increase in a stock price brought on by an excess of short selling. The price increases rapidly as the short sellers “cover” their positions by buying the stock back, this could mean covering for a profit from a short trade from higher or covering for a loss to eliminate excessive, potentially limitless losses in the future.
Why does the price of a stock rapidly increase during a short squeeze?
When short sellers cover their positions, they must buy the stock back. This can create buying pressure. As the buying pressure increases so does the upward momentum of the stock price. It isn’t uncommon to see a 10% - 15% daily rise in a stock that is being short squeezed.
What makes up a “short-squeeze” candidate?
A stock that is poised for a potential short squeeze, is a stock with a high percentage short interest or short float. Short interest, is the number of shares that have been sold short but have not yet been covered. This is usually expressed as a percentage. When a high percentage of a stock is held short (25%+) after a long term sell off and basing pattern this can potentially setup the stock for a short squeeze.
Remember momentum can work in both directions, up and down. Eventually momentum dries up on either side of the trade – both long and short. Generally, this is met with a rapid reversal in the stock price. At the “top” this is met with excessive selling and at a bottom this is met with excessive buying. In the case of a “short squeeze” (near a potential bottom but not always) The stock is rapidly bought from both sides, new investors and traders in the trade and more importantly the short sellers covering their positions.
What is considered high short float %?
The higher the short float %, the more likely the stock has the potential for a short squeeze. The higher the percentage, the bigger the potential move or squeeze may be. if the stock price were to reverse higher, rapidly due to good news, hedge funds covering a short position or any other sort of catalyst that reverses the stock price.
I have a "Hot Pepper" Scale for this! --->
How do I find Short Interest of a stock?
I like to use www.finviz.com to find these numbers. Its easy to do – here’s how:
1. Go to www.finviz.com
2. On the home page search your stock symbol, we will use $CAR for example:
3. On the stock symbol page, you will find a spread sheet with the information you need:
*The short interest is listed as “Short Float” defined as a percentage (Highlighted Red / Yellow box)
How does market sentiment play a role in the Anatomy of a Short Squeeze trade?
In nearly every stock chart, human tendencies and emotions can be plotted. There are always two sides to every trade! When a trade is going your way long or short, a series of emotions in the stock chart / trade can be plotted. When market sentiment becomes extremely negative, a reversal to the upside may be in play. When market sentiment becomes extremely positive a reversal to the downside may be in play.
As the market participants make money a series of emotions may follow. Simply put when traders and investors are making money enthusiasm, greed, and delusion are part of the psychological aspect during the profitable phase.
As the market participants lose money a series of emotions may follow. Simply put when traders and investors are losing money fear, capitulation, and despair are part of the psychological aspect during the drawdown phase.
Let’s look at a series of charts that show the emotional side of the trade both on the long side and on the short side. Try to put yourself in the shoes of the opposing side of the trade.
Here are the series of emotions plotted on the long side (Think about how a bear would feel):
What happens if you flip this chart upside down though? Can the same be plotted for a short seller on the right side of the trade? YES IT CAN!
As you can see with these examples there are two sides to each trade. The market works conjointly on either side of the trade. It just depends on which side you’re on.
Ok, now that we have all the tools to spot this phenomenon lets look at how it played out with $MARA step by step!
This $MARA setup initially caught my eye because of the bottoming pattern (Inverse head and shoulders) but as I dug deeper I noticed the BIG accumulation volume patterns and the very high short interest! (Over 40%) "Ghost Pepper" on the hot pepper scale!
Slowly but surely the pattern began to firm up!
The stock made a clean break to the upside! Notice the above average volume day just one day previous? A very bullish sign and potentially some short covering (Squeeze) to get the move started!
The strength and volume continued to pour in!
In just 3 short days the stock made a 20%+ move and hit the first target of $11! This is the power that these setups can potentially produce!
Learn to spot and trade these setups and make them your very own!!!