Tue. Oct 26th, 2021

Trading stocks with a lot of short interest is a risky proposition. Many are shortened for a reason and each time they decrease with the step. However, not all short sellers are right, and when an action starts to explode and forces short sellers to cover (buy), that is where things can be very interesting. July wasn’t a very good month for our Short Squeeze stocks, but August has been crazy. I introduced Cortexyme (CRTX) and Support.com (SPRT) in early August and noted that they both had the next revenue, which could provide a catalyst for a breakup and short coverage. Since July 31, these two shares have increased by 86% and 412%, respectively.

Below is an August “Brief Report” that I send to our EarningsBeats.com members at the beginning of each month (September will be out this weekend). At the bottom was Riot Blockchain (RIOT), when it was at 32.95. It is now at 38.75 and threatens to make a big break closer to 40. If that happens, we could definitely see RIOT making a big leap forward, possibly similar to CRTX and SPRT. See me.

Enjoy the August brief report below, and if you’d like to take a FREE 30-day 30TA trial at EarningsBeats.com, you’ll receive our September short report over the weekend. CLICK HERE to start the 30-day free trial. Give us a chance, I would love for you to come on board!

Short Squeeze ChartList

Our Short Squeeze ChartList (SSCL), made up of the shortest stocks, can be found on our website and has just been updated this weekend. Under “Members,” click “Chart Lists.” Then just scroll down until you see this list of graphics. Click the link provided and type the password provided next to the ChartList link. You can then view the list of charts or download them to your StockCharts.com account, as long as you are an Extra or Pro member at StockCharts.com.

Hot actions

I try to narrow down the list of possible SSCL transactions by looking only at stocks with solid relative strength (SCTR> 70) and some bullish momentum (PPO> 1). Last month, I did an analysis against SSCL looking for daily PPO> 1 and SCTR scores> 70 and it produced 7 stocks. Here they were at the time:

It wasn’t a big month for our Short Squeeze ChartList (SSCL) stocks. The 7 mentioned last month that had relative strength and momentum had poor overall results, the only exception being the CVNA. The following is explained on July 7:

CVNA was in a position to benefit from a double rupture. Here is the chart I provided last month, followed by the current chart:

June 30, 2021:

July 31, 2021:

I see possible problems here. First, there is a negative divergence in the game. Normally, I would ignore technical warning signs like this in case I increase the volume with a high volume. But take a look at this volume. It’s not exactly like shorts are within reach. In any case, I would worry about the the lack of a small compression.

Short mass coverage of stocks with a sharp deficit was simply not a thing in July. It remains to be seen if that becomes a thing in August, but I wanted to provide you with an updated list of current SSCL stocks that meet our SCTR> 70 and PPO> 1 filters. Here are them for August:

Both CRTX and SPRT present their quarterly results this week, so there is at least one possible catalyst to get things started. MRIN went from its 1.71 close on June 23 to an intraday high of 27.26 just two weeks later on July 6. It was a favorite craft of the Reddit group, which led to the incredible rise. MRIN reported results on Friday after closing, but appeared to be trading lower on Friday after hours. Revenue declined quarter-on-quarter and its EPS improved by a penny, going from a loss of 0.22 to a loss of 0.21. I didn’t see any revenue or EPS estimates, so I’m not sure what Wall Street expected.

I would consider these three actions to be extraordinarily risky, but also with significant potential returns. SPRT could see a lot of short hedges if it can eliminate its key intraday price resistance, as reflected below:

Theme

Historically, technology (XLK) tends to work well during August. Since the secular bull market began in April 2013, the XLK has not experienced a decline in July and its trend has been to expand those gains as we move into August. July and August have been the two best months in terms of the number of years during this secular bull market that XLK has surpassed. Below is the eight-year season chart for the XLK and S&P 500:

Given the promising seasonal period of technology, it probably makes sense to consider SSCL stocks that belong in the technology sector.

Short Squeeze Trade Candidate

Looking ahead to July, I presented KDMN, suggesting that it could be a solid and fast candidate in a high-volume breakthrough, going through key price resistance, near 4.20. Here is the chart provided last month:

Well, KDMN experienced a weak first fortnight of July, but then exploded higher on July 16 and reached an intraday high of 4.87. It certainly provided a very short profit opportunity as it fell last week:

This chart really exemplifies the extremely volatile nature of short press candidates. That’s why I think we should keep position sizes small, even if we changed them. A large position can become very emotional with the wild swings associated with these types of stocks.

As I look at the possibilities of tightening in August, keeping this technology issue in mind, I feel drawn to see RIOT. RIOT has a very strong positive correlation with bitcoin ($ BTCUSD) and the latter has started to strengthen again. If RIOT can go back up to 40, I think a lot of shorts would be forced to cover, which could cause stocks to skyrocket. Here is the current view:

Happy trading!

Tom

Tom Bowley

About the author:
Tom Bowley is the lead market strategist for EarningsBeats.com, a company that provides a research and education platform for investment professionals and individual investors. Tom writes a comprehensive daily market report (DMR), which provides guidance to EB.com members every day that the stock market is open. Tom has been providing technical expertise here at StockCharts.com since 2006 and also has a background in public accounting, combining a unique competency to approach the U.S. stock market. Learn more

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