February 27, 2006 at 10:30 pm | | Comments 1

What a Short Squeeze Looks Like

Short selling can generate some nice profits….quickly. Maybe that’s why the word short is used – because it can be such a quick trade.

I noticed OPMR this afternoon and cringed for those traders caught on the wrong side of a short squeeze. This stock had been moving steadily lower and had even confirmed a couple of chart patterns along the way. However, trying to swing trade a stock so badly beaten up on the short side can be tricky, so be sure that you pay attention when you’re short.

Short Selling OPMR had been moving steadily lower before the trade got crowded and the path of least resistance suddenly changed.

A short squeeze occurs when a downtrending stock suddenly catches a bid and begins to rise. The traders who have short positions begin to see their trading profits slip away, causing them to panic and buy to cover their shorts. This quickly pushes prices higher, and upside momentum replaces the downtrend due to the sudden burst of buying. One look at this 2-day chart of OPMR and it’s easy to see that plenty of traders got caught on the wrong side.

Short Squeeze Once OPMR changed directions, it was smooth sailing to the upside with shorts covering for the past 2 days.

Uptrending stocks will occasionally be met with a heavy dose of selling, seemingly out of nowhere. This is the same kind of behavior that leads to short squeezes, and is characterized by a large group of traders reacting to a shift in a stock’s direction.

Short selling is not a poor trading method, so there’s nothing to be afraid of. As long as you keep your stop loss in place and remain disciplined, you can avoid getting caught in a short squeeze. Just don’t ever underestimate the level of pain in a stock when you’re trading the short side, and be quick to take profits when the landscape begins to change!

Add another dimension to your trading and watch how I trade the short side with a 2-week FREE TRIAL to my stock newsletter.

Jeff White
President, The Stock Bandit, Inc.

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  1. From - Dream, Trade, Grow » What a Short Squeeze Looks Like on Mar 14, 2006

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