One of my favorite swing trades is the traditional breakout or breakdown trade on the daily chart. My favorite breakout pattern is probably the cup and handle. The name of the formation is not important. What is important is that price reached an area of resistance 2 previous times (when going long) and is now approaching the resistance area for the 3rd time. Also important is that the previous swing low was higher that swing low before that. Some get fancy and call it other names, ascending triangle, head and shoulders. Whatever it is you want to call it, the important thing is that if price doesn’t break the third time, there are some big players that don’t want it going up.
Not the most picture perfect example but you can see resistance back in March was then sort of retested in early May then a sharp move up again in later May. When it comes roaring up like that, I’ll take my chances that it’ll breakout on a strong stock like this.
So that is just some background on regular vanilla breakout trades that I like to take. Nothing more, nothing less than what I just typed out. Don’t need to get cute with super precise entries on an intraday chart or have any super complicated money management other than the 3×3 method I covered in an earlier post.
ALRIGHT BRO, so what is the odds enhancer? Get to the good shit. I don’t care about the plain jane stuff. Gimme the grail!
Well the past few weeks I have been trying to up my game, add some new weapons if you will. Of course in the past I’ve read several times about short squeezes. Never took an interest in them as I usually associated them with penny stocks or day trading stocks that have big gaps up where short sellers panic after a sharp rise and prices just go to the moon. I accidentally came across some articles on short squeezes for swing trading and did some research.
After absorbing what I had read and putting together a tactic and paper trading it a few times, I had a very high success rate (for at least the entry). I won’t go into money management because I am still working on that. Just using the 3×3 method for now and seems to be working. I went live with it this week and so far I have 2 winners (paper trades I was 3 for 4).
So how do you do it. Spill the beans. Take me to paradise. You just wasted 5 minutes of my time writing all that nonsense above. Alright, alright.
Head on over to Finviz. On the screener, we want to search for stocks susceptible to short squeezes. What this means is that we want stocks priced over $10, avg volume > 750k and here’s the important titty-bits. You want to search for “short float” over 15%. This is the percentage of total shares being shorted. The higher, the better. Also “short ratio” you want 5 or more. This is the total number of days short sellers have to cover their positions. It is relative to the average daily shares traded and short positions.
Here is one I’m in now. Notice the red box. This stock is being shorted out the ass, almost 26% of shares outstanding are shorts. I don’t know why, I don’t care. But it’s in an uptrend and about to break out of the resistance I drew in with an orange line. I placed an order to buy should this stock break out and it did. And they usually will, if you picked the right spot where short sellers are getting their stops hit. That is up to you to determine where it may be.
That’s it for the screener. What’s the trigger?
So what we want is an entry at a point where short sellers are thinking “oh shit.” And a traditional breakout point (long) is the perfect place where a lot of stop orders will be hit and other short sellers will be feeling the burn. You do not want to use this tactic with stocks that are down trending strongly or in a wild range.
Here is another one I’m in now. I never know if there will be strong follow through or not but the odds are definitely on my side.
Just look at that. Half of all the shares outstanding are being shorted! That is pretty crazy if you think about it. And it has been showing an uptrend as of late (although weak). There is also a nice breakout formation where I placed the orange line. I was entered into this trade on Friday. Hoping to see some continuation on Monday and the more this goes up, the more those short sellers are going to panic and get out of this and that means more $$ in my pocket.
Here is one I paper traded. Wow. Just look at this squeeze. I believe the short float at the time was over 50% as well. The short sellers are still trying to get out of this and panic has set in. Who knows how much higher it will go.
As for now the way I will approach these going forward is to scan for new potential short squeezes every Sunday. Put out my orders a cent or so above the breakout point and let them do their magic. Unfortunately, although you may get a candidate or two per week, they don’t always trigger. So you might go a week or longer without any trades. It’s a great odds enhancer and a great way to boost your win rate if you can stay patient and take only these types of trades.
I’m also researching how these might be good day trading candidates as well. Imagine getting into a trade like OMER with a tight stop using day trading size and just trailing the stop up above the previous day’s low. My goodness that’s a monster trade where if you can nail one a year, it’ll more than make up for all the small losses.
Will update on the results and how these are going. Happy trading. Ya filthy animals.