The most violent explosion in the market: The Short Squeeze. (Post 18/45)

(If you're interested in my previous posts, f o l l o w m e !)

Welcome to post #18.

In the one that's past, I told you that there's unlimited risk when shorting a stock, or betting against it. If you short a stock at $2 and it suddenly shoots up to $20, your entire account is lost. You can end up owing a lot of money to your broker.

So, what does happen when several short sellers are all caught wrongly in their trades at the same time?

You receive a \*\*Short Squeeze\*\*. And it's the most violent, face-melting chart that you will ever see on a stock chart!

This is the exact psychology behind how it goes.

Suppose that a garbage can stocks becomes $3.00. A mass of short sellers examines the chart and decides, "This company is worthless! It has no revenue and it's certainly going down to 50 cents today!"

So they all borrow millions of shares and short the stock. They have a lot of money to back their bets on gravity working its magic.

However, it doesn't...

Perhaps the company comes through with some real news, unexpected news. Or perhaps a large trading group decides to simply go on a buying spree. For whatever reason, the stock won't budge. Instead, it ticks up to $3.50.

Short sellers are in a sweat now. They have significant losses to address.

It ticks up to $4.00. They're now cashing in.

After some time, the pain becomes too intense. Or their broker calls them and tells them: “You don't have enough cash in your account anymore to continue holding this losing bet, get out.”

Because those short sellers are legally required to do one thing to put their losing positions out of the red, they must buy the stock back from the open market.

Consider how this affects the Level 2 order book mentioned in post #15.

Many normal traders are already buying the stock as the chart is looking good. Now you have a huge army of panicked short sellers pumping the buy button at any price in order to get out of the positions.

All this buying pressure is unleashed at the same moment. They are not matched with the number of sellers. So the price just teleports upward. $5.00. $7.00. $10.00!

The more short sellers start to sell in response to the rising price, the more they're locked out by the short sellers' stop loss points, and thus the more they buy, and the higher the price goes. It turns into a continuous and vicious cycle of panic purchasing. Gravity turns off to 0.

If you recall the whole GameStop mess a few years ago... that was a huge, worldwide short squeeze! But in the penny stock world it takes place almost every week (in miniature form).

If you are short of a squeeze (you bought early in the market), you can make 500% in a couple of hours. You have to wait for another 10 minutes, or it will end your trading career if you are on the wrong side (you shorted it).

Well, that's the mechanics explained, so now, how the heck do you feel about it? Breakouts, VWAP, Level 2, support floors and squeezes.

There are more than 10,000 stocks available in the market. Where are the 3 or 4 penny stocks doing this right now?

You don't guess. You use a scanner. In post #19 we're going to create the ultimate morning scanner.