Here’s The Next GameStop-Style Short Squeeze

A short seller borrows shares of a company from a broker – and then immediately sells them in the open market. They put that money in their account, for the time being, and, importantly, they still "owe" the shares they sold to their broker.

That's where the "short squeeze" potentially begins.

Success for the short seller depends on one thing: They must buy the same stock that they owe their broker back at a lower price to make money. If the stock goes higher, they lose money, sometimes lots of it, sometimes in a very short time – like with GameStop.

That's the essence of the "short squeeze."

I performed studies on short squeezes way back in 2004 (Hey, I told you this is one of my favorite indicators) that showed short-squeeze candidates outperform the market by more than 2:1 with a success rate that approached 90%.

Those kinds of numbers are stunning for the trader willing to remain consistent in using the approach.

Two weeks ago, GameStop showed up on my biweekly Short Squeeze Candidate list. When I ran the model, it gave me 182 candidate companies, and GameStop was among the strongest short-squeeze contenders, as were Opko Health Inc. (Nasdaq: OPK), along with Ollie's Bargain Outlet Holdings Inc. (Nasdaq: OLLI) and, believe it or not, Kroger Co. (NYSE: KR) – two of my favorite stocks of the pandemic-era bull market.

From my data model's perspective, a stock becomes a short-squeeze candidate when three criteria are met.

  1. The stock has a short interest ratio of 6.0 or higher.
  2. The stock is trading above its 50-day moving average
  3. The stock's 50-day moving average is climbing higher itself (a bullish trend)

If a stock checks those three boxes, it's a huge sign that the short sellers are betting against a stock that's actually about to move higher; it tells me the shorts are poised to lose and primed to suffer some financial pain in the form of a short squeeze.

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Disclaimer: Any performance results described herein are not based on actual trading of securities but are instead based on a hypothetical trading account which entered and exited the suggested ...

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