Short interest, short ratio, short squeeze and squeezability.

(Become familiar with them to succeed in both short and long trades)

Short interest

Short interest is the absolute number of short shares, sold and yet uncovered, for a given stock.  It is one of the most important variables predicting future stock appreciation. 

Short interest is considered a contrarian indicator. The higher the short interest, the higher the chance that the stock price eventually goes UP on a "short squeeze".    

Short ratio

The short interest divided by average daily volume, commonly calculated using the 90-day average volume.  The result, expressed in TIME UNITS,  is the number of days that would take covering the short interest at current volumes.

We avoid using the short ratio as an indicator of squeezability.  Trading volumes, as well as selling pressure, may vary depending on many different factors:  Dilution, insider dumping, good/bad news, non-trending churning, etc.  We prefer to use the the percentage of short shares relative to float, since it clearly indicates how difficult would be for short sellers finding "available shares" when covering during a squeeze emergency.

Short squeeze

A situation in which a highly shorted stock suffers a price increase, sometimes related to good news, but often without an apparent cause.  "Shorts" (short sellers) buy to cover their short positions, creating more buying pressure.  At a certain point, the stock will trade at a price higher that shorts’ entry-range, and shorts start incurring into paper losses.  As the stock rallies, momentum players join the buying side, longs "sense" they can wait and sell at higher prices, true sellers disappear, short shares for more shorting are often unavailable and even market makers can help by gapping prices UP in consecutive sessions.  Short sellers are often trapped by emotions, and as prices soar, concerns turn into fear, and fear turns into panic.  Panic ultimately leads to hopeless covering ("chasing the ask", covering at market at higher prices and with added slippage) with great losses.  A short squeeze is like a train without brakes! 

After the initial buying frenzy is over, more often than not new short sellers join the game, speculating that the uptrend is exhausted.  Decreased momentum, price divergences, volume, and other confusing indicators are frequently used to "guess the top". This dangerous behavior restores the short interest, leading to new cycles that create a protracted, chronic short squeeze

"Squeezability"

Term we use to indicate the susceptibility for a short squeeze in individual stocks.  Our squeezability index takes into account the percentage of short shares relative to float.  Highly shorted stocks are likely to experience a short squeeze.  In traders jargon, increasing short-interest is often called "rocket fuel". 

We combine squeezability with other variables that help predicting explosive price increases in undervalued stocks.  We AVOID shorting squeezable stocks, but we do GO LONG on value stocks and growth stocks that are also squeezable.