Editorial

The Art of the Squeeze

If you don’t know what a short squeeze is… well suffice it to say, it’s a big reason why I don’t short penny stocks…

Given the potential for manipulation in penny stocks and the lack of fundamental reporting, there is plenty of room to get caught in a squeeze… even in companies that have no value…

And if you do get caught in a short squeeze… you will be in a world of hurt… and potentially see the end of your trading career… even on a single trade.

While I don’t short a penny stocks for this reason… buying into a squeeze… now that’s a beautiful thing.

I prefer to always be on the long side in these situations.

Today I am going to show you how to find stocks with the potential for a short squeeze… and tomorrow I am going to send you some stocks that I am watching which fit this criteria.

 

Selling Short

Let’s start at the root… selling short…

Selling a stock short is just the opposite of buying a stock… you’re selling it… the thing is you don’t own the stock you are selling…

So in selling short, you are selling a stock that you don’t own, in the hope that the price will fall.

Basically you are borrowing the shares from your broker to sell now… and then you buy the shares at a later date, hopefully at a lower price, and return them to the broker…

It’s not complicated though because it’s all taken care of behind the scenes at your broker…

All you have to do is put in sell and buy orders as you would with any trade, you are just selling first vs. buying first…

 

Why would you want to do this?

Let’s say you think the price of a stock is going down… well obviously you aren’t going to buy that stock…

But being confident in your prediction, wouldn’t it be nice to have a way to make money on it?

This is where you can benefit from selling short.

By selling the stock now… and buying it back when it’s lower… sell high, buy low… you can make money when a stock goes down in price…

… and of course lose money if it goes up… because you have to buy the stock back at a higher price…

Short selling is considered more risky than buying though…

Consider this: A stock can only go down to 0 but it can go up forever…

If you are long a stock that goes from 1 to 0 you would lose all of your money and the loss would stop there.

If you are short that same stock at 1, but it goes up to 2… you just lost all of your money as well.

But it’s not over… if that stock goes from 2 to 4 on a squeeze, you can literally lose more than 100% of your money when you are short…

And imagine if the squeeze kept pushing and it was at 8 the next day…

Good bye trading career… and life savings.

Use with caution.

 

The Short Squeeze


Now for the juice you’ve been waiting for…

We know that people sell short when they think a stock is going down… well what if it doesn’t go down?

It’s no secret the losses will begin to pile up. So just like any trade, short sellers will have stop losses to get them out at key levels or predetermined thresholds of pain.

These same levels may also attract big buyers who see breaks above these same key levels to be a bullish sign.

Due to these factors, these price levels can become areas of heavy trading activity and a great trading opportunity when short interest is at extremely high levels.

A breach of these levels can trigger a powerful chain reaction of buying, both short sellers trying to cut losses and get out of the way, and new buyers coming in on the bullish price action.

All of this buying causes a surge in the stock price, called a short squeeze.

 

How to Find Stocks with Short Squeeze Potential

 

When I look for stocks with the potential of a short squeeze, I am looking at specific market forces that when put together are exactly what can create the power to push a stock into an unstoppable surge in price…

I am looking at how concentrated the short interest in a stock is, as well as, the recent price action of the stock.

These together have the power to set it off.

 

Short Interest Concentration


Short interest is simply the total outstanding number of shorted shares that are present in a stock.

Many people assume that a high short interest level in a stock alone tells the story. This is not the case.

I want to see how concentrated the short interest is, so I want to look at it in relation to both average daily volume and level of the float.

For that I use the Days to Cover (Short Ratio) and the Short Percentage of Float

The higher these numbers, the higher the relative level of concentrated short interest is in a stock.

 

Days To Cover (Short Ratio)

The Short Ratio is calculated by dividing the total number of shares shorted by the stock’s average daily volume.

This gives basically tells you how many days it would take to close out all of the short interest in the stock… the higher the more pressure.

I am generally looking for a Short Ratio of 5 or higher.

 

Short Percent of Float

This is calculated by dividing the total number of shares shorted by the stock’s float (shares available for trading).

The higher this percentage is, the more short sellers there will be competing against each other to buy the stock back if its price starts to rise. Many people find 10% to be the level where it gets dicey…

But again, with these ratios, the higher the better, and I love to see 20% plus on this…

 

Recent Price Action

As you know, when traders are short a stock, they lose money when the stock goes up.

So logically, the stronger the stock’s price performance is, the more pain people who are short the stock will be feeling.

Basically, what’s going to push someone to cover their short? A strong stock that won’t let up and breaks key levels… A stock that pushes them to the brink of collapse…

Think about being short in a stock that is in a strong uptrend, not fun… what’s keeping you in at this point?

Maybe there is one last major resistance level you think it can hold, so you put your stop there…

Maybe it’s a 52-week high, 50 day MA, or the 200 day MA… whatever it is…

… with such a high concentration of short interest, imagine how many other people have their stops in the same area…


Putting it Together

This stock you are short is sitting with a days to cover of 10, and a short percent of float of 30%… these together show a high concentration of short interest, which puts a lot of pressure on the stock

Now what’s it gonna take to squeeze? You see if the stock is going down, all of those traders are making money… it’s the price action, strong bullish price action that will set it off

So here you are sitting short with a stop above the 52 week high.

The stock glides right up to the 52 week high and all of a sudden a big buyer steps in and pushes it through… initiating a chain reaction of buying interest to surge into a stock…

With stops triggering stops, triggering stops, and buyers jumping in at the same time squeezing the shorts even harder… it takes on a life of its own.

And that my friends is the powerful market force called the short squeeze.

Pay attention to these ratios and short with caution…

When it comes to penny stocks and short squeezes, I prefer to be on the buy side. You can control the risk better and there can be a lot of money when a stock catches a squeeze…

In no way is it easy to determine when a short squeeze will happen, otherwise we would all be rich… but knowing the keys gives us an advantage by having eyes on them ahead of time.

Now that you have the knowledge of the forces… I have searched out stocks with short squeeze potential…

And I am going to share some of the stocks that I am watching now…

So stay tuned and check your inbox for my short sale stocks to watch coming out tomorrow…


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