What’s a Short Squeeze?

Last week we talked about how I discovered my love for the short squeeze because of its ability to make my money work harder for me. This week we’ll be further defining what a short squeeze is and what circumstances it takes to make this happen.

How does a short squeeze occur…

A short squeeze begins due to high short interest.

95% of stocks have regular short interest rates but the other 5% are heavily shorted because funds are betting that they’ll roll over and fail.

However, a short squeeze occurs when sellers are wrong, and they have to cover fast. So they buy it back to mitigate their loss. Simultaneously, a lot of buying interest is drummed up by another force (this can largely be due to the media) which creates a force of brand new buyers to enter the market. 

Here’s a daily chart of Chewy (CHWY):

This one exploded at the highs, on a solid high volume move which you could see via the TrendStrength Turbo candles. 

When both those groups buying at the same time happens in unison, it creates massive upside potential and a tradeable momentum move, for me.

Five Star Tip: New Buyers + Short Sellers = Explosion of Stock Price

Don’t miss out on Danielle Shay’s course of the month where she explains how to use this full strategy in her Short Interest Secrets class. Click the image to learn more.

How Is This Different From The TTM Squeeze?

As an options trader I’m sure you’ve heard about the TTM Squeeze, so you might be asking yourself what’s the difference between that and the short Squeeze?

Both focus on consolidation that breaks out. As an options trader it’s quintessential to identify a move that’s going to be greater than expected. However there’s one key difference: the TTM bursts out then pauses — almost like a plateau, while the short Squeeze continues to make high after high. So, if you can identify the short squeeze pattern you can continually trade them on a regular basis. Both the regular squeeze and the short squeeze can be helpful but mastering when to apply each one allows you to see much larger returns.

On this Advanced Micro Devices (AMD) chart below you can see why a Squeeze is still effective but a short Squeeze can add a little extra more:

It had a Squeeze, but it didn’t have over 10% high short interest. When the momentum broke out, it made first and secondary targets, but not the third target, which it likely would’ve done if it additionally had high short interest. It’s still a great setup, but not as explosive as the Short Squeeze. 

Who Can Benefit From The Short Squeeze?

The beauty of this pattern is that it can be applied with a combination of any individual trader’s strategy. I’ve personally mixed this strategy with my five star strategy (buying on dips and strong trends), finding phoenix (identifying regular strength buys), and stacking profits (by using butterflies placed with Fibonacci analysis).

Whatever you’re comfortable with, you can make the short squeeze work with you

Another benefit to riding the short squeeze is that it can be applicable to any account size. The key is that you can make astronomical percentage gain within your account.  

For example, I could invest anywhere between $100 and $1500, but ultimately I’m looking for percentage gains. I trade these setups via long calls, credit spreads, and butterflies (and they work in small and large accounts alike). It’s all about consistency, identifying the pattern, and taking advantage of the move. Because these moves are so explosive, they typically result in my best percentage gains out of all my strategies

And Perhaps The Greatest Benefit Of All

Is that this pattern is very recognizable. Once you know how to identify it, you can do it from anywhere.

One of my favorite stories to tell was the time I was in Jamaica watching the close. I saw this pattern and couldn’t resist. With no time to spare, I hopped onto my mobile app and started trading from the pool! Worked like a charm. 

Check out the 15 minute chart of Tesla (TSLA) below:

I entered using the Short Squeeze setup directly before a major gap up, earning me 5k overnight while on vacation. 

If you’re interested in applying it to your own trading style, this is the pattern I taught during my Short Interest Secrets class, along with how to expertly time your entries and exits. Click on this link to learn more.

Next week, we’ll be discussing exactly when the best moments in time are to trade short Squeezes. Stay tuned for next Thursday’s episode of my Short Interest Series!