Coming off a holiday-shortened trading week, it’s time to again get geared up for a full 5-session sprint come Monday morning. Are you ready for it?
As you prepare for the next few days of trading, let’s take a close look at the big picture of the market and see what’s taking place out there. The indexes are the place to begin, so here in Episode 24 that’s exactly what we’ll focus on.
(Be sure to click the full-screen option for best viewing.)
Hope you enjoy the show! Thanks for watching and subscribing, and feel free to post your ideas and comments down below.
Trade like a Bandit!
Jeff White
President, TheStockBandit, Inc.
www.TheStockBandit.com (Premium service)
www.TheStockBandit.net (Trading Blog)
February 22nd, 2009 at 8:05 pm
Hello - this is interesting stuff, as always. Much appreciated.
One question came to mind again when you mentioned oversold conditions and I wonder if you could answer: you have already mentioned short squeezes before and there are a lot of places in the web where you can read about them. However, I found it impossible to obtain an explanation for the continuous upward push which can last for quite a few days.
When you are a bear and are short and want to buy back chances are it’s not your first trade and you have some experience with this. You probably know the short interest of your stock and have a feeling re squeeze risk. You decide to bail out when your stock rises and you hope that your order gets filled soon. Of course, sellers know about all of this too. The desparate ones are happy to sell at the slightest uptick and save the bear’s day, the cunning ones see the sqeeze as what it is and hold on, waiting for a higher price. So you should see a dry-up in volume, as long as there are few desparate sellers, and you should see a buy imbalance - much more buyers than sellers. The prudent bear sees what is happening and knows that his stock only rises because co-bears want to exit and not because a miracle has happened to the company or the market. So why does he not ride this wave out and waits until the frenzy is over? Is he on un-bearable margin?
I thought most short sellers were fund managers (=professionals) and would be perfectly aware of these mechanics. So how can a sustained updraught be created by a bunch of people who all know that all they have to do is sit on their hands and then the prices will come down again?
And why are squeezes not only happening on low volume?
Maybe others are interested in an anatomical dissection of the short squeeze, too.
Sorry for the long text, P.F.
February 25th, 2009 at 9:54 pm
Hey Peter,
Thanks for your comments, I always enjoy them.
As for the mechanics of a short squeeze, let me start by saying I don’t know that they can all be classified the same. However, I do think it is more than the shorts covering. Typically you’ll find they come from deeply oversold levels, so there are some value players stepping in with cash to scoop up some perceived bargains. At the same time, bears sense the need to cover and quickly move to do so. As everyone begins to buy, the surge can be powerful and long-lasting. Momentum players soon become involved and before you know it there are multiple kinds of players included in the mix - not just the bears.
Why doesn’t the prudent bear ride it out? Well I suspect he thinks he can re-enter at a better price and reduce his risk in the meantime. I’m willing to bet there is also the element of doubt that creeps in when the initial spike becomes a multi-day climb, eating at the mind of that bear who wonders if that was “it” and it’s time to bail. I don’t think anyone is immune to emotion in the market, so that’s likely the X-factor for even the prudent bear.
And volume I believe is powerful because of the multiple parties involved, otherwise I think it would be light if it were only the bears moving to cover.
Hope this helps with some things. Thanks again for your comments, keep em coming!
Jeff
March 1st, 2009 at 7:10 pm
Hello Jeff,
Yes, it helped - thanks. It is just that I am amazed by the short interest some stock has and I am trying to make sense of a situation where more than 2 weeks need to be spent on nothing else but buying back what was sold short previously. In such a situation, is it not virtually guaranteed that the bears who come just a few hours late to the buy-back get their fur shaved because the market is clogged with buy-back orders which get filled at ever higher prices?
Unfortunately, the short interest data come only twice per month, and only from institutions; I do not know if Worden or shortsqueeze.com has the most up-to-date data. Do you know of any indicator one could use to estimate the change in short interest in between updates? I try to look at short interest for some of the Dow 30 stock to get an idea how sincere an uptrend is, but with data 2 weeks old there is quite some uncertainty in this and I am not quite sure if this just isn’t anything but a waste of time.
March 1st, 2009 at 8:38 pm
Hey Peter,
I don’t think there are any guarantees in the market, so to conclude that bears will get trounced who are a few hours late to buy back shares isn’t in all likelihood a fair assessment. After all, they don’t have to jump in line to cover their shorts - they can buy instantly at the market. It isn’t as though they must wait for 2 weeks or something like that.
Truth be told, I do not ever consider the short interest data. As you stated, it is delayed quite a bit and therefore not accurate for the present in that regard. However, I am a pattern trader and I expect to see what I need to know in the charts - not a report put out by institutions. It’s my intention to avoid institutional reports altogether!
I would say if you are able to reliably calculate something with the use of short interest data, then go for it. But as for me, I’ll be looking to short bearish patterns and buy those which are bullish.
Hope this helps!
Jeff