Short squeezes and high-risk trades have been all the rage in the media with stocks like Game Stop (GME) and Bed Bath & Beyond (BBBY) flying up to unthinkable daily prices.
But how can you profit from a short squeeze if you think a company is being targeted by a large amount of buyers?
First lets makes sure we understand what a short squeeze is and why they happen.
A short squeeze happens when a gap up or abrupt move higher takes place in a security with high short interest, forcing traders that had taken a negative position to buy back their shares for a loss, thus creating a large amount of upward pressure as panic buying takes place.
The large upward price move forces even more short sellers to liquidate their positions resulting in a short squeeze.
Ideally, the stock would also be a low float stock which means the security has a low number of shares available to purchase.
This can increase the potential squeeze as buyers fight to buy a limited number of shares.
So how do you profit from a potential squeeze?
Ideally you would already be in the trade and be taking profits as it runs higher. But if you want to participate the next best thing is taking a very quick or active trade using a rule developed to take advantage of short-term momentum.
The 5-minute opening range. The opening range was developed in the days of trading on the floor of the commodities exchange. Traders (Mish, Keith and Geoff all excelled at this) would use this simple method to decide whether to enter a trade or let it pass.
To use it, take the first 5 minutes of the stock’s opening price, then buy the stock or security if it breaks the high of the 5-minute range for 2 consecutive minutes.
You can see this done in the above Bed Bath and Beyond (BBBY) stock chart.
This gives you a clear method to watch if momentum is breaking to the upside or the downside. You can simply stop yourself out with a small loss of it breaks the 5-minute opening range low. Setting a stop loss is very important.
While nothing is perfect it can save you from some nasty morning selloffs as well as getting you into some great movers like BBBY on Tuesday. Or help you avoid getting hurt like the fake out in Beyond Meat BYND.
S&P 500 (SPY) 385 area to clear and hold.
Russell 2000 (IWM) 212.92 the 10-Day Moving Average (DMA)
Dow (DIA) 312.71 resistance. With main support the 50-DMA at 302.87.
Nasdaq (QQQ) Inside Doji Day.
KRE (Regional Banks) 55.92 support. Resistance 58.19 the 10-DMA.
SMH (Semiconductors) inside day.
IYT (Transportation) Watching to hold 22.49 the 50-DMA.
IBB (Biotechnology) 163.06 the 10-DMA minor support.
XRT (Retail) Inside day. 82.51 high to clear.
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The author may have a position in the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
