There’s a few companies out there that are just getting obliterated in the market. At some point the short-interest gets so high that the odds are suddenly stacked in favor of the longs.
For example, I grabbed trades in both Boeing (BA) and Delta Airlines (DAL) in my Weekly Money Multiplier account. I managed to sneak in some quick profits on Delta, while I’ve got the Boeing trade on right now!
The question isn’t which names I pick up for the trades. It’s how, why, and when I pick them up, and that’s what I want to explain today.
Sure, you could scattershot all the most beaten up names, like all the airlines. Problem is we’re starting to see correlation break down. That means some stocks are winners and others are losers.
So how do you go about finding the right moment and the right stock?
One of the key elements to getting these epic moves in stocks is the short-squeeze. Here’s how these short-squeezes occur.
First, you get a lot of people betting against a stock. They ‘short’ shares by borrowing on margin from their broker. They make money as long as the stock keeps going down. However, they lose money when the stock gets above their entry price.
Here’s the problem. In theory, stocks can go up forever. So, at some point the broker forces them to liquidate their positions. That means they buy shares to close out, which sends up share prices even further. That causes more traders to cover their position, and you get a cascading effect.
That’s why you get some ridiculous moves of 20%-30% in some well known names.
DAL Hourly Chart
It’s almost like they become penny stocks!
Now, you don’t want to grab just any stock with high short-float. Rather, find the ones that have higher short-float now than they do normally. Bigger names are also better. The more well known they are, the more likely they’ll get a short-squeeze from a broad market rally.
Use Key Support Levels
As with any chart that you trade, support levels become a crucial element to the setup. That means looking back at historical data to figure out what’s going on.
Check out how Delta found support at its IPO price from before the financial crisis.
DAL Monthly Chart
Even going back 13 years, you can find support levels within the chart that is crashing.
Now, there’s a few methods to finding support levels.
- Fibonacci Retracements – This involves selecting the most recent swing high and swing low, then carving up the distance between them by 23.6%, 38.2%, 50%, 61.8%, and 76.3%.
- Swing Points – When markets make important highs and lows, these become support and resistance areas.
- Congestion areas – You’ll find areas that stocks spent a lot of time trading in a range. This is a good sign that buyers will come back to defend this area
If you can get several of these to line up then you’ve got a nice high probability trade on your hands.
Don’t Fight The Market
The last thing you want to do is swim upstream when the market is falling. It’s not easy in this market, but there’s a few things that can help.
First, look at the natural patterns we’re seeing throughout the day with the market. We gap down, get a move higher into the midday, and then selloff to the close. It’s been pretty rare to have a gap down and fall much further. I use this market cycle timing to my advantage.
I’ll also look for signs of relative outperformance. This doesn’t have to be a lot or last very long. Even if you see a market that’s down 7% and the stock is only down 3%, that’s something to hang your hat on.
Watch For Intraday Reversals
Chart reversal patterns are a great way to spot trade setups. Not only do they give you a heads up on a potential move, but they also provide something to trade against.
Think of an engulfing candle, where you have one giant green candle’s body encompass the previous candle or two. That gives you a low to trade against. If the stock closes below that low you can simply exit for a small loss and move on.
Pay attention to the markets. They may be difficult, but they have a lot to teach us. I’m constantly learning new things and jotting notes into my trade journal.
It’s something I talk about extensively in my upcoming webinar. I explain how I used this to develop my TPS strategy and become a consistently profitable trader.