Hey There!
With the Meme stocks running up 9 days in a row, I think it’s time to take a look at the charts!
Let’s look at AMC.
AMC squeezed up 45% on Monday after 10 green days in a row. |
| Here is the 5 minute chart: |
To understand why this happens, you have to understand what a short squeeze is.
So if you’re not familiar with a short squeeze, here’s the basics.
If you are bearish on a stock you can take a short position.
This means, you sell a stock to open your position with plans to buy it back at a lower price to close the position.
Example: Stock XYZ is trading at $10 and you think it is going to go down. So you open a short position of 100 shares at $10. Your broker will give you a credit of $1000 into your account. (this is all done using margin… a credit line from your broker)
If the stock goes down to $8 and you decide to close the position, you would buy that stock back for $800 using your $1000 credit leaving you with $200 in profit.
If the stock were to go up to $12 and you wanted to close the position, you would have to buy it back for more than you sold… costing you $200.
Losses are technically unlimited when you short a stock because the price could go up forever, and the only way to close the position is to buy the stock at the current price.
So…
When a stock has a large amount of traders shorting it, and that stock moves up fast it can trap them… leaving only one way out.
To buy the stock.
So if bullish traders are already buying the stock, and the bears are forced to buy the stock to close their position, it’s like rocket fuel on a stock price!
So were there any signs that it was going to Squeeze up?
AMC is a highly shorted stock.
Since the squeeze a year ago, when it makes large moves up, short sellers come in expecting it to crash back down.
And it’s done this for them over and over as you can see here. |
If you sold at all these green lines (not even the very top) you could’ve bought back in a lot cheaper a week later.
But this time when it didn’t drop, and kept running up… this squeeze was on! |
The volume tells us that short positions were piling in when AMC looked like it was forming a triple top around 20. (To have that much volume you need a lot of buyers and sellers)
When the stock didn’t drop, and held for 2 days, it gave us signs that a possible squeeze would happen.
We know all these short positions are starting to sweat…and were forced to hold these positions over the weekend.
They were probably using the previous wicks as stop losses.
So on Monday when AMC started moving up, and breaking through stop losses we saw the big move.
We might see more consolidation after such a big move, with a lot of profit taking… then it will cool off or continue squeezing.
If you like learning about things like this, and looking at charts, you can join me every Monday on my Live 1K Club call.
Hope to see you there!
Happy Trading,
Markay |
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