In case you hadn't been introduced, I will leave you some links at the end of my post.
Let's go to the important
Anatomy of a Shortsqueeze on BTC
As you can see on my chart, the last indicator is a ShortLong plot of Bitfinex L/S being open, Short = Red, Long = Green. The black is a L/S ratio.
You can see a threshold as a broken line, above that level is where "thing happens".
What happens when Short goes out of control? Shortsqueeze. That means a scarce-volume climb up of price, without fundamental or logic. That would push the shortsellers to close their position, and that means a buy over the price. That brings to the market, and with comes the price and stimuli of the market. Remember exchanges win with the fee.
How can you spot them? Well, the Shortsqueeze leaves their footprints on the chart, and you can use it on your advantage at large timeframes with patience.
I spotted them for yourself on this one.
Although every short squeeze is different in terms of length and circumstance, there are similarities to each event. Given those similarities, we analyze the anatomy of the short squeeze below:
A short squeeze is often caused by low expectations, which causes investors to initiate short positions. Low expectations are due to a variety of reasons, including:
- the company keeps missing expectations
- guidance is weak
- the company is in a secularly declining field (i.e. newspapers)
- management lacks credibility and keeps disappointing investors
- management puts themselves, not shareholders first, and keeps plunders the value in a company
- the market believes demand will decrease as the company’s product is a fad
- the stock is super overvalued and there might be a potential catalyst in the future that could cause the market to revalue the company
Shorts Build the Short position – Put or Short
Due to those low expectations, investors initiate short positions by either buying put positions or shorting the stock. If they initiate put positions, the chance of a short squeeze is lower. If the counterparty who sold the put position offsets some of his exposure by shorting, however, the chance of short squeeze could still be present.
Event That Beats Those Low Expectations Occurs
Given the low expectations, an event that beats those expectations could prompt some shorts to cover, or for some longs to buy.
Those events include:
- report comes in way better than expectations
- the company announced big contract win
- the FDA approves a drug of the company’s
- some external event happens that could lead investors to believe there could be more demand in the future
- management announces a big buyback program that the market believes
- management raises the dividend a lot
- guidance blows out estimates
- a press release prompts pumpers to ignite a buying frenzy
The Stock Rises and Short Squeeze Occurs
Due to those events, some shorts might cover or longs will buy, causing the stock to go up. The rising stock causes more momentum buyers to pay attention, which triggers more buying. That buying squeezes weak shorts and forces potential margin calls and risk-management buying.
The Short Squeeze Ends
Eventually the forced buying finishes and momentum traders move on to the next name, and the stock begins falling, sometimes dramatically.
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