Is THIS the Best Opportunity in the Market Right Now?
Dear Penny Stock Millionaire,
It’s always smart to be aware of the overall market. You need to watch for new trends and adapt to market changes.
Short squeezes are one of the best opportunities to look for right now. Short sellers are like the new promoters. Actually, they’re even better…
The old penny stock promoters — with their mailers, emails, and social media posts — weren’t as good at getting a stock price up as these short sellers are.
Short Sellers Are the New Promoters
Short sellers are great at moving stock prices up because they love to short stocks with news on the first green day.
It’s kinda funny how all these newbie short sellers mock my lessons. But at the same time, they’re using the strategy that I helped popularize.
The difference is — they aren’t studying! They’re not learning the nuances of trading and shorting. When I was a short seller, I was shorting pumps.
I would never short a stock with news on its first green day. That’s all these shorts do — short any stock that’s up. They’re basing their theories on fundamentals. They think the company shouldn’t be valued so high, so it has to come down.
This isn’t a good short selling strategy. But I hope the short selling trend continues. It’s great for long traders.
So how do short sellers make prices go up? When a stock changes momentum to the upside, all the shorts have to buy to cover their position. The influx of buyers causes the price to go up.
Then all the shorts just chase each other to get out as they drive the price higher. Or even worse, they average up. That causes the price to surge even higher later when the stock continues going up.
Short sellers don’t realize they’re the ones causing the price to keep going up!
Short Squeeze Examples
Not all short squeezes happen on the first day a stock is spiking. Short sellers also get in stocks that are consolidating. Their theory is that the stock price will eventually go down. But then when the stock continues its upward trend, they start getting squeezed out of their positions.
Let’s look at TRIL first…
Trillium Therapeutics Inc. (NASDAQ: TRIL)
TRIL was trending up for a few weeks before the short squeeze. It had a multi-day breakout on January 2. But then it consolidated for four days, topping out around $1.50 on two of those days. The shorts all thought that was the top…
Then on January 9, the stock opened with a gap up to $1.60. That proved the shorts were wrong.
The short squeeze continued all day, with the price climbing to a high of $3.43. The next day, there was a slight morning dip … Then it spiked again, squeezing more early shorts who thought the dip was the end.
No promoter can move stock prices like this. In two days the stock went from $1.60 to $3.90.
TRIL chart: 2-day, 1-minute candle — courtesy of StocksToTrade.com
Counterpath Corporation (NASDAQ: CPAH)
Here’s another great example of a short squeeze. CPAH started spiking after hours on January 9. The company released news it’s working with Honeywell. The unified communications solution is set to increase productivity for mobile workers.
In the press release, a Honeywell executive was quoted. When the big company is quoted in a press release, it’s usually good for the small company’s stock. It legitimizes the small company in these kinds of deals.
Let’s look at the chart so you can get an idea of what the shorts are thinking.
CPAH chart: 2-day, 1-minute candle — courtesy of StocksToTrade.com
Notice the after-hours spike on January 9. In pre-market trading on January 10, the stock was downtrending all morning. Shorts assumed the downtrend would continue.
They were right at first — the stock dipped slightly right at the open. But then it started trending upward on high volume. Anyone shorting in the premarket was quickly in the red. They had to buy to cover.
But then the stock consolidated for about two hours between $2.10 and $2.50. Shorts were probably thinking …”Ok, this is definitely the top” … and loaded up. Then it cracked below the intraday support of $2.10. The shorts took that as a signal that they were right and they probably added to their positions. In their minds, this was the end…
The stock went down to $1.75 where it found support and went sideways during mid-morning. But then it spiked back up and through the previous high-of-day. Those big candles on the chart are all the shorts buying to cover.
Once the stock consolidated through midday, shorts piled back in. Surely this was the top … nope.
The stock spiked again, driving all the shorts to buy to cover before the close. Some stubborn ones probably held overnight, hoping for a gap down the next day. Instead, the stock gapped up and had two big spikes in the morning.
You can see how these might be a little trickier to trade. You have to think the opposite way that the shorts do. Where are their risk levels? Where will they buy to cover? Once you understand that you can take advantage on the long side.
History Doesn’t Repeat Itself… But It Rhymes
I always tell students to study the past. Remember former runners… I say stuff like this because the past usually repeats itself. Stocks almost have personalities. Traders remember the stocks that run and the stocks that fail.
But trading isn’t an exact science…
By looking back at the daily chart you can see that every time the stock tried to spike, it failed. Look at all the long top wicks on the chart. So why was it different this time? Was the news so great that the stock deserved to spike this time? Nope.
CPAH chart: 2-year, daily candle — courtesy of StocksToTrade.com
It’s because of all the short sellers in this market. The stock hasn’t held its highs before. And that’s what brought in more shorts and made the move so powerful.
This is where adapting to the market comes into play. You need to be able to adapt to changing trends. You need to recognize these changes and learn to take advantage of them.
Don’t think that every chart with failed spikes will now spike and hold its highs. It’s only in this inverse market where there are too many short sellers. Be flexible and adaptable.
Is Short Selling a Good Strategy?
Lately there are a lot of newbie short sellers giving the strategy a bad reputation. So can shorting be a good strategy? The short answer is yes. But again, trading isn’t an exact science. It’s not as simple as shorting any stock that’s up. Always remember trading is risky … never risk more than you can afford.
You always need to consider your risk/reward. You need a plan for your entry and exit and where you’ll cut losses if the trade goes against you.
Shorting can be a profitable strategy. But you need to know what you’re doing. Some of my most successful students short. But they only trade specific setups and use rules for every trade. You want to focus on the highest odds setups.
The best shorting opportunities are when stocks are overextended — when a stock spikes multiple days without a red day. Then one day it opens with a gap down. That’s the first time long traders have a reason to worry. It signals a trend change.
There’s usually a morning panic as the longs take profits and the shorts pile in. That’s when it’s the backside of the move and better odds for shorting.
So… if short squeezes are so great, why don’t I trade them?
First of all, I stick to what I’m good at. I like my OTCs and patterns that have made me successful over 20+ years in the market. But I understand the reasons behind these moves because I was a short seller for years. I know how they think.
Some students are good at trading short squeezes. And I teach them to be self-sufficient. They don’t trade exactly what I trade — and I like it that way.
You need to know what setups work best for you — and stick to them. There’s more than one way to make money in this market. There’s no right or wrong way. It’s only about what works for you.
Second, I trade scared. I’m not buying a stock that’s up multiple dollars in one day. And I don’t encourage my students to, either. But if you can get in early on one of these spikes and take the meat of the move, that’s great.
The higher the price goes, the riskier the trade is. When all the shorts are squeezed out, the buying stops and the price plummets. So trade scared!
You want to be prepared for these short squeezes. If you use a social media search tool like the one on StocksToTrade, you’d know that all the shorts were gearing up for CPAH. The thing about shorts? They love to brag. They’ll tell anyone who will listen about their position. They think they’re so noble. Like they know the price will go down.
You need to understand that the market doesn’t care about what you think or what you think you know. You can’t assume or anticipate moves. If you have a thesis, you need to wait for the stock to prove itself.
The market’s always right. If you’re wrong, you need to cut losses quickly and get out.
Editor, Penny Stock Millionaires