Some of my favourite stock market jargon was once found within a meme stonk article when Redditors were trying to squeeze $GME and $AMC. In online conversation, someone had written: ‘You’ve got to wait for the squeeze to be squoze, then sell.’ Only on Reddit, is such brilliant terminology conjugated.
Now, I’m an active, short based trader, so I’m regularly locating and crediting borrows through TradeZero’s platform. But very recently in my trading, I’ve been going long, looking for potential squeezes ‘to squoze’, which has become a key component within my trading strategy.
How it works?
When a heavily shorted stock doesn’t go to plan for shorts – and it stops going down (reverses/breaks trend) – there comes a point where shorts have to cover, buying back their position. When short day traders cover it creates a wave of buying pressure/demand on a stock.
A bright, sharp witted long day trader can predict the moment where shorts are going to have to cover, causing the price to go up, and will also take a long position, specifically for that reason. Taking this long position creates a second wave of buying pressure.
So what creates the squeeze? Well, traders like to hope their plan is not going to fail and shorts are no exception. In many instances shorts will leave it until the absolute last minute to cover their position on their trading platform, avoiding a loss at all costs.
When longs pile in and many shorts panic cover together: the squeeze is squoze.
Ultimately, long, active traders make a quick buck and shorts lose significantly more than they initially intended, had they cut their loss earlier. Some naughty shorts may choose to add to their position, an execution strategy that often leads to account destruction.
Now the fundamental rationale is understood, let’s break down some examples where I capitalised on shorts that got ‘squoze’ this week
$PETZ on November 4
$PETZ initially gapped on news of an entry into agreement and closing of a Registered Direct Placement of 9.9 million common shares and warrants.
I consider this a poor reason for a stock to be up, as will many other shorts, making it a heavily shorted stock. Often the best squeezes occur with the absolute worst companies, as these stocks have the most traders short, using the most size.
$PETZ failed to break down throughout the afternoon and, as a result, smart shorts hit the exit early.
The afternoon consolidation provided a base for longs to enter. This is because they are – in theory – protected by a wall of consolidation where the price is less likely to go lower.
As more long traders join the party the stock price increases and shorts begin to panic thinking they will have to cover their short position for a loss.
At 2:40pm the structure has formed to create a potential squeeze as the consolidation begins to grind higher.
In a last-minute, knee-jerk reaction longs pile in, shorts cover and the squeeze is squoze.
$PPSI on November 8
$PPSI was hot early in pre-market with demand reaching the tens of millions even before 9:30 AM. The company’s tiny 4 million float had already rotated several times, creating chaos early on.
$PPSI also generates good revenue, around 20 million last year alone, giving the move more credibility.
The move started with a press release stating $PPSI is adding mobile electric chargers to their product line, creating a gap pre-market from the 3s to the 6s.
Now, the biggest mistake a short seller can make is getting into a position for the sole reason that a stock ‘is up too much’ Shorting stocks up too much, is not a strategy.
The army of ‘making bank bro’ shorts trading this in pre-market and throughout the morning would have been annihilated had they not covered as the stock broke through the 6.50s and 7s.
The same trading logic applies to both examples: when a stock isn’t breaking down it provides a long opportunity to enter for a potential squeeze knowing shorts may be forced to cover.
Now it’s over to you: let me know if you catch a squeeze next week and if so let me know on my twitter @jonk87.
Now this is a fairly long biased article so don’t get me wrong, shorting is lucrative in day trading; but it’s only lucrative when you cut your losses when you’re wrong.
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