A popular market breadth indicator, the McClellan oscillator is one of the tools that MoneyShow's To...
Tools to Find the Next Tesla
03/11/2014 9:25 am EST
Market technician Brian Shannon discusses some of the tools that he uses to find stocks like Tesla and explains why short squeezes can provide good opportunities.
SPEAKER: I’m here with Brian Shannon talking about the short squeeze and Brian, I remember when you were talking about Tesla at $42 a share. Could you for those people who aren’t familiar with that story, could you remind us about that trade? Talk to us about that set up, walk us through that situation?
BRIAN SHANNON: Tesla has been a monster move and everyone knows the story by now but when it was about $40 a share, it had just broken out to a new high and there was maybe some news involved. I don’t remember but there was a very high short interest position so there are two ways to look at short interests which are either percentage of the float short and what I’ll look for there is maybe 10% or higher and then the short interest ratio which is the number of days to cover it’s also known as so days to cover kind of tells us based on the average daily volume of maybe a million shares, if there are 10 million shares outstanding, then it would take 10 days of theoretical shorts covering to get out so the higher the short interest ratio, theoretically the more difficult it is to get out of that position and they become trapped and buy in a fearful manner and get squeezed basically.
SPEAKER: So, you do these kinds of scans. You were watching it. Did it come to your attention through a scan on like FINVIZ or like how did this come to your attention?
BRIAN SHANNON: I use FINVIZ, it’s a good starting place. It’s a free tool. It’s a really good starting place. A lot of times what I actually do is I’ll just look at the charts themselves. I look through hundreds of charts each, thousands each week and then once I cull them down to the best looking charts on multiple timeframes, I’ll look at things like the short interest ratio because it’s an extra source of demand potentially and when it gets a high short interest, then it gets my attention and a lot of times it’s a fad-type stock or something that’s controversial. Crocs was a great one if you remember that. Like Jones Soda, TASER, now Tesla and I mean there are shorts being squeezed all the time and they can just be really spectacular performers because you have that fearful buying.
SPEAKER: For someone that’s not familiar with that term, let’s just go back to that term, the short squeeze. What does that refer to and why are they calling it a squeeze?
BRIAN SHANNON: Yeah, exactly, so I’m not really sure exactly why they call it a squeeze but I think, I used to have a little blog called SqueezeShortblogspot.com and I had a picture of this guy who’s head was in a vise and basically the pressure is just so bad, it was a cartoon, it wasn’t anything graphic but the point is that they’re buying from a fearful position because if they shorted it under $40 a share and the stock breaks out to an all-time high, then in theory they are losing money and that the potential of unlimited losses really gets them to be a fearful buyer. Now we never know if they’re hedged some way but if we’ve got a stock breaking out to new highs where it’s never traded higher, no one’s going to be looking to break even, there won’t be that natural source of supply from profit takers, then you have people piling into the stock and again, you’ve got a great looking car and at the time, it had just won the Motor Trend Car of the Year or the safest car by the US Government, Consumer Reports actually said the safest report, safest car but those, every once in awhile it’s kind of the perfect storm. I mean the shorts aren’t stupid though. They get them right a lot of time but if their timing is off, then it really can be a disaster for them and a lot of fun on the upside.
SPEAKER: Well, that’s a fantastic story and information about the short squeeze. Thank you, Brian.
BRIAN SHANNON: Thanks.
SPEAKER: You’re watching the MoneyShow Video Network.
Related Articles on TRADING
While fundamentalists delve into economic and financial data to analyze the market, technicians emp...
Being able to determine market direction is a trader’s most important skill, writes Markus He...
Markus Heitkoetter discusses reward/risk ratios and winning percentage, and why determining the dir...