Mark Haines called me out back in the day saying I was using Voodoo science to trade the market.
When he said it, I was taken back a bit as he referred to how I use the market sentiment and the Volatility – or fear – Index (VIX) in my approach to trading the market.
Well, since then the VIX has made leaps and bounds in the market and people are watching it on an hourly basis at this point to trade.
And sentiment has been carved in stone as an indicator of market direction, and everybody is talking about it, some people even refer to it as the greed meter for the market.
One of the tools that I use to easily read the sentiment of the market is the AAII Investor Sentiment Survey, and right now it is flashing that the market is in a greedy moment:
And the VIX started to dip below 20.
The combination of these two things moving the way they are tells me that people are starting to feel good about this market.
Contrary to popular belief, that is bad for the market…
I was sitting here screaming at the screen yesterday – as all of the traders here at Money Morning Live do – screaming the battle cry of “short squeeze”
The greed in the market is the root cause.
You can look at short squeezes on an intraday basis but those are the small ones, the ones that don’t really matter because the benefits are short-lived (see what I did there)
Shorts don’t walk away from stocks very often.
You see this is a more advanced form of trading and you have to have some true fortitude – or more money than you know what to do with it…
Rather than walking away, they will add one to the chamber and short even more shares.
If a stock is moving higher AND the short interest is high, that’s when you can hear that battle cry start to be murmured from the shadows by the short-term traders.
The real profits come from when the long-term ‘squeezers’ are stepping away.
That is what we saw in AMC Entertainment Holdings (AMC) and GameStop Corp. (GME), when a stock is driven up 50-60% in just a few days.
Even in those cases, the shorts told you they were not leaving.
So there’s a difference between these two squeezes, a true short squeeze doesn’t just push the market up by half a percent.
You can still make money from intraday squeezes, especially if you are trading with Kenny, but I’m here to talk about the long game.
You could take the easy approach and just bet against Jim Cramer and Cathy Wood, their following has gotten large enough that when they are yelling ‘Buy, Buy, Buy” they are actually artificially creating selling pressure.
So when he says to buy, you can just say to sell it – that’s the simple approach.
It’s kind of a knuckle-dragger way of betting against the market because you don’t have anything to back up your trade – other than some bigshot with a huge following doing the opposite ‘thing’.
But there is a better way.
Be the counterintuitive contrarian…
This is a term I use often, but what is it?
You don’t just simply do the opposite of what the group is doing, you have to qualify it.
You take the common sense that you would typically use to trade and make it your enemy.
You have to look at the things that matter, don’t bet on a stock simply because it’s going up or going down.
Trade stocks that are going higher even when the rest of the market is betting against them.
This is the thought process you need to approach a potential short squeeze with…
If the technicals and fundamentals are good, should you be shorting it?
Hell no!
If everybody else is shorting it… buy the hell out of it.
There is a checklist of things that you can look for to capitalize on a potential short squeeze and I am going to make it as simple as possible for you:
- Is the short-interest ratio above 6?
- Is the short float above 10%?
- Is the 50-day moving average (MA50) moving higher?
- Is the stock already above the MA50?
- Is the stock above the 200-day moving average (MA200)?
If you ask yourself these 5 questions when hunting for a potential short squeeze, you’ll find a gaggle of stocks that you want to trade.
This is the recipe for a true short squeeze, and I’ll tell you what, since you’ve made it this far and gotten the ‘secret sauce’ I’m going to make your first group of stocks even easier to find…
Tomorrow, I plan on sending you a watchlist of stocks that meet most – if not all – of the above criteria so you can be prepared to trade them with me as we move into next week.
But, I do want to warn you that my Penny Hawk text alert list is going to be getting early access.
If you haven’t signed up for it yet – what are you doing… it’s FREE – you can sign up by clicking right here.
This will ensure that you are among the first group of people to get their hands on this week’s watchlist.
This week we are going to be trading this watchlist with all of my services.
That’s right my Alpha Accelerators, Night Traders, and even my Double Your Money members are going to get a taste of the stocks on this list.
If you want to get in on the exact trades we are going to be making, just select the service above and I’ll make sure you get all of the details on how to get started!
Talk soon,
