In stock trading, a "short squeeze" is when a stock goes up significantly in a short period of time due to short sellers covering their short positions. When traders take a short position, they have a negative share position. To close their position entirely, they need to buy back shares in the amount that they are negative. If this happens all at once with many short sellers, it will create lots of buying which is known as a short squeeze.
How Exactly Can You Predict a Short Squeeze?
Our strategy for predicting this is relatively simple. It won't find every short squeeze on the market, but it will help you find some with good odds of success.
Step 1: Find a stock with high short interest
Short interest is the number of shares that are currently short in the market. If a stock has 1 million shares in its float and 150,000 shares short, its short interest % would be 15% of the float. For me, a stock with a short interest of over 10% is considered to be a good candidate for a squeeze. Some people also refer to short interest as a percentage of the amount of shares outstanding, but we prefer to use the float.
You can find short interest data on various websites such as finviz.com, Yahoo Finance, shortsqueeze.com and others. Also, a good site specifically made to show highly shorted stocks is highshortinterest.com.
Here's an example of what short interest would look like on Yahoo Finance under the "statistics" of a particular stock.
Above is the short interest for Wayfair (W). The number we would look at is the 34.17% short % of float. It's important to note that short interest numbers are updated once a month in the middle of the month, so the numbers won't be up to date all the time but it will give you a general idea of the situation.
Step 2: Identify a Good Chart Pattern
This step is sometimes easier said than done. What one person thinks is a good chart, another person may think the opposite. We look for classic candlestick chart patterns such as triangles (descending, ascending, symmetrical), bull flags/pennants, cup & handle, inverse head & shoulder, and more. Here's an example of what we look for.
Above is a chart of Virgin Galactic Holdings Stock (Ticker: SPCE). The pattern that we drew there via the two trend lines is an example of an ascending triangle pattern. An ascending triangle is when the top line of the resistance is relatively flat, and the support line is coming up diagonally. This creates a range for the stock that gets tighter and tighter until it breaks out again. Note: Chart patterns should be combined with volume analysis for confirmation.
Step 3: Combine Volume Analysis With Chart Analysis For Confirmation
As you can see, the range was getting tighter before breaking out. We also noted the volume patterns prior to the breakout. The stock was on a nice uptrend prior to consolidating into the triangle. As the stock was running up before the triangle formed, the volume was relatively high, rising, all on green days.
When it started to pull back, the volume began to drop off as you can see indicated in the chart. The consolidation period was on low volume which is exactly what you want. A low volume pull back/consolidation shows that the selling pressure is most likely some profit taking rather than the beginning of a big sell off.
As the consolidation was coming to an end, the volume on green days was increasing, which is a sign of accumulation. The first buy signal here was a bullish engulfing candle that formed right at the ascending trend line, combined with slightly higher volume that day. Buying on that day would be buying on anticipation of a short squeeze.
The next day, the stock actually broke out of the range confirming the short squeeze. This was combined with even higher volume than the previous day AND the stock closed near the high of day which shows strength going into the close. That would have been another buying point.
Step 4: Buy the Stock
Buy the stock and ride the wave. Make sure to take full or partial profits along the way and don't get greedy! Have an initial stop loss below a recent support level (usually on the daily time frame) to minimize losses. If the stock goes up after buying, you can also use a trailing stop loss to lock in profits along the way.
More Examples of Short Squeezes
Luckin Coffee (LK): On June 2, we tweeted a short squeeze prediction for Luckin Coffee's stock.
Here's the tweet prediction:
Here's the result just two days later:
The stock blew past our initial target very quickly. This was a result of high short interest, and a breakout of a tightening range that was displaying higher volume on up days.
Tupperware Brands (TUP): Another stock we predicted a short squeeze in was TUP.
Here's the tweet prediction:
TUP formed an inverse head & shoulders pattern which is another classic bullish candlestick pattern. What made it a high odds trade was how the volume since around March had almost always been higher on up days (the black volume bars). The red volume bars were generally lower. This showed big accumulation in the stock, combined with a bullish candlestick pattern, it was ready to go.
Here's the result:
TUP hit $4 that same day. Then, a few days passed and we tweeted our new target of $4.40, which also proceeded to be reached the very next day. The $4.40 prediction in the follow up tweet was made because of the consolidation on low relative volume, followed by a big up candle with bigger volume (the most recent candle in the picture).
Overstock (OSTK): One more prediction just to prove a point.
Here's the tweet prediction:
Here's the result 4 days later:
Why we longed OSTK: Again, good short interest, good volume patterns, and a good chart pattern. OSTK bounced off the 20EMA with a big engulfing candle on heavier volume than the few days prior. The 20EMA was an important support zone in this scenario as OSTK was a stock with lots of momentum. For more info about why we used the 20EMA, check out this comprehensive blog post we wrote about swing trading momentum stocks, as it may help you understand this trade better.
In terms of the chart pattern itself, OSTK was a symmetrical triangle breakout. Here's a chart with notes in it below:
We hope this blog helps you spot short squeezes in the future! Contact us on twitter or by email at firstname.lastname@example.org if you have any questions about this trading strategy. Be sure to check out our swing trading strategy that is working very well in this strong market.