To start the year off, I’m doing a four-part series on things to watch in 2020, starting with short squeezes.
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 in 2020. 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.
How are these short sellers so good at getting prices up?
Table of Contents
- 1 Short Sellers Are the New Promoters
- 2 Short Squeeze Examples
- 3 History Doesn’t Repeat Itself … But It Often Rhymes
- 4 Can Short Selling Be a Good Strategy?
- 5 Become a Self-Sufficient Trader
- 6 Be Prepared
Short Sellers Are the New Promoters
They’re great at moving stock prices up because they love to short stocks with news on the first green day.
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.
The foolish short sellers don’t realize they’re the ones causing the price to keep going up!
Let’s look at a few recent examples…
Short Squeeze Examples
So below are two recent examples of short squeezes. The first one was on January 9 and a recent runner. The second was on a first green day on a stock with news.
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.
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.
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.
SO SWEET: $CPAH beautiful short squeeze, god bless all these fucken idiot shorts on Fridays!
— Timothy Sykes (@timothysykes) January 10, 2020
History Doesn’t Repeat Itself … But It Often 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.
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.
Can Short Selling Be 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.
Check out my student Huddie’s presentation at the 2019 Trader & Investor Summit. He has great tips for new traders, like focusing on what you’re good at. And his favorite strategy is short selling.
Another resource to learn short selling is my DVD “ShortStocking.” Get a copy if shorting is part of your trading strategy. But again, I don’t recommend it as a strategy for new traders. Gain more experience and learn the market first.
Become a Self-Sufficient Trader
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.
I share these opportunities with my students by alerting the chat room. 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!
I have to give props to students who were braver than I am. Some were buying TRIL on the second-day spike and others were trading CPAH…
Trading Challenge — Comments From Students
09:42 AM BigMike92: 3.34 to 3.75 on TRIL will take it
09:42 AM Ioan1994: TRIL 300 long 3.10 out 3.67 … dip buy. I trade scared, but better safe than sorry
09:42 AM the_tipsy_nomad: Sold TRIL at 3.75 from 3.25
09:44 AM PaulaNYC: Thanks for mentioning selling half – I was in TRIL 3.03 – out 1/2 3.57 – then 3.87 because you said that. You’re awesome!
09:48 AM GrmnWondrBread: Super risky CPAH in at 1.57 out at 1.85
09:50 AM Popcheez: Bought $CPAH @ 1.7 sold at 1.95 🙂
09:50 AM roberthill: out 1300 $CPAH 1.57-1.95
09:51 AM Steve626: $CPAH Profits $1800 in 1.47 out 1.85!
09:57 AM RPhTrader: $CPAH all out. banked $300
10:08 AM Kauai2020: $CPAH in at 2.12 out 2.24
10:09 AM alayonj: $cpah In a 1.69 out at 2.27
So many students killin’ it!* And that’s only a short list. There were so many more. TRIL and CPAH were both on my morning watchlist I send out to subscribers.
Apply for my Trading Challenge to get a daily watchlist, plus access to the chat room and all my video lessons and DVDs.
👉🏼SUBSCRIBE to my FREE weekly stock watchlist here.
Check out these students* nailing some great plays…
— rebeltrades (@REBEL_5CUM) January 10, 2020
— realtylerclark (@realtylerclark2) January 10, 2020
I did a quick scan today with @StocksToTrade @timothysykes and my list for today were these. I scratched $ttnp $krp $acrs. They seemed dead. So I concentrated on $tril and $cpah. Well l didn’t chose cpah. Dam. Writing my rules as I go. Rookie me. Still reading my book. [email protected] pic.twitter.com/OmjEt8dNHQ
— alejandro (@aaaale512) January 10, 2020
$CPAH in @ $1.35 out @ $1.50 (then watched it soar). Restored my confidence in this weeks choppy market. Short squeezing, January effect, potential war conflicts have made for an interesting week of trading. @timothysykes helped me prepare. Thank you, sir.
— Mike (@Mike40074307) January 11, 2020
[*Students’ results aren’t typical. These students put in the time and dedication and have exceptional skills and knowledge. Most traders lose money. Always remember trading is risky … never risk more than you can afford.]
You want to be prepared for these short squeezes. How? Use StocksToTrade.
If you’d used the social media search tool 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.
These stocks can turn fast and the spikes are even faster. CPAH even had a halt at the high of daybreak in the morning. The spike continued … but you never know what a stock will do when it re-opens after a halt.
What do you think about this post? Let me know in the comments … I love to hear from you!