The Search for the
‘Holly’ Grail
Brian Shannon @alphatrends
[Link]
Sunday October 1, 2017
Man vs Machine?
or
Man AND Machine!
[Link]
WHAT WE WILL COVER
1 - Who is Holly?
2 - Market Structure Review
3 - Short Sales – Why, How and When
4 - Short Squeeze
• Why they occur
• Short Interest
• Days to cover
• How Accurate is the short information?
5 - Two Types of Short Squeezes
• Knee Jerk
• Structural
[Link]
1 - Who Is Holly?
[Link]
User Friendly Artificial Intelligence Designed to:
• Back test strategies before you commit $$$ to trades
• Simplify search for setups with statistical edges
• Automate the entire trading process
• Help you become more profitable
[Link]
Technical analysis allows us to objectively observe price action
so we can minimize the impact of emotional decision making
Listen to the message of the market, not your emotions!
[Link]
2 – Market Structure Review
[Link]
Understanding Market Structure -
The Four Stages Graphic
Plan of Action:
STAGE 1 - ACCUMULATION
Anticipate Long/Cover Short
STAGE 2 - MARKUP
Participate Long/ Avoid Short
ANTICIPATE
STAGE 3 - DISTRIBUTION PARTICIPATE
Exit Long/ Anticipate Short EXIT
AVOID
STAGE 4- DECLINE
Participate Short/ Avoid Long
[Link]
3 – Short Sales
• Borrow stock from broker to sell(short) and
buy back at a lower price to profit
• Always use a buy stop
• Stocks typically decline much faster than
they rise (fear vs greed)
• Stick to stocks in a Stage 4 Decline, Stocks in a downtrend are “guilty
until proven innocent”
• It is a bonus if there are “bad fundamentals” in the underlying company,
but not essential to make a good short (news follows trend)
• Seriously consider buying some back on “bad news” (who is left to sell)
[Link]
Selling Short
• Be skeptical of takeover rumors in down trending
stocks
• Do not chase lower, ask “where has it come from &
potential to go?”
• Consider options strategies to implement bearish
ideas, limit losses if market moves against you
• Timing even more important than with longs when
primary market trend is higher
• Try not to be influenced by “obvious” reasons (market is only up because
of Fed) There is ALWAYS something to worry about.
• If sector and market do not agree with the setup in the individual stock,
adjust position size to compensate
[Link]
Selling Short
Don’t get caught in the emotional cycle
Same emotions for short sellers but at opposite times than longs
[Link]
Selling Short
Short Sales The Right Way
Plan of Action for Trend Participation:
Primary Trend
DAY Stage 4 Decline
Identify Trade Candidate *guilty until proven innocent*
Intermediate Trend Stage 1 Accumulation –Exit
Stage 2 Uptrend – Avoid
65/30/10 Minute
Plan your Trade Stage 3 Distribution – ANTICIPATE
Stage 4 Decline – PARTICIPATE
Short Term Trend
10/5/2 Minute Fine tune your timing
Trade your Plan
[Link]
Selling Short
Identify the trade candidate on a larger timeframe
[Link]
Establish a RISK / REWARD Scenario
Before Entry, Answer 2 Important Questions:
1- Where has stock come from?
RISK
Has it expended a lot of energy, is it
extended, what is volume pattern, where
does stop go? DO NOT CHASE!!
2- Where does it have the potential to go
before likely resistance (long) or support
(short) is found?
REWARD
There must be enough profit
potential relative to perceived risk
[Link]
Selling Short
Plan and execute the trade on an intraday timeframe
[Link]
Short Selling
The two timeframes together
PLAN on the longer timeframe Execute & manage risk on shorter timeframe
[Link]
Short Selling - Risks
• Short sales are more difficult than going
long
• Only short stocks in a downtrend
(downtrend definition)
• “Unlimited” potential for loss
• Some of the sharpest rallies occur in
downtrends (don’t fall for them long)
• Do not short after a 2-3 days of decline
• Be quicker to take partial profits than
when long
• Do not short “obvious” ideas, especially if
they are still in an uptrend
[Link]
Risk Management is Job #1!!
Selling Short
We manage risk by lowering stops to just above the most recent & relevant lower high
[Link]
4 – Short Squeeze
• A rapid run-up in price within a heavily shorted stock which is
exaggerated by short sellers covering their bearish positions
• FEAR of unlimited upside
• Stocks in an uptrend are “innocent
until proven guilty”
• Double demand – “natural” longs and
shorts trying to cover
• Lack of supply- stocks near all time
highs do not have “trapped longs”
looking to get out at breakeven
[Link]
Short Squeeze Dynamics - Short Interest
• Total number of shares sold short and not covered (representing future
demand)
• Updated by the exchanges 2x per month
• Available at [Link] [Link] [Link]
Significant lag time between settle date of trade and when numbers are publicly reported
[Link]
Short Squeezes
TERMINIOLOGY- Short Interest Ratio (SIR)
aka Days to Cover
Short Interest / Average Daily Volume = SIR
Short Interest Ratio Short Position Daily Volume S.I.R*
(SIR) is the amount of
days it would take
2 Million Shares 2 Million Shares 1
shorts to cover their
bearish bets based on
2 Million Shares 500,000 Shares 4
the most recent
average daily volume. 2 Million Shares 250,000 Shares
8*
Days To Cover (SIR) Numbers may vary on different sites,
depends on # days used in average volume calculation
*over 5 Days to Cover is generally significant
[Link]
Short Squeezes
Short interest ratio can change without a change in number of shares sold
short because the average volume may change
[Link]
How accurate is the short information as reported by
regulatory agencies?
“Markets can remain irrational longer than you can remain solvent.”
~John Maynard Keynes
[Link]
Daily Short Trading – More Active Than Most People Realize!
[Link]
[Link]
Short Squeeze Stock Characteristics
• Up trending stock or one near a breakout
(double demand and less supply)
• Often strong fundamentals (revenues &
earnings)
• Often a “fad” stock
• Know approximate level where short position
was initiated
• High (over 5) Short Interest Ratio (SIR aka
Days to Cover)
• High percentage of floating shares short
(more than 5-10% gets my attention)
[Link]
5 – Two Types of Short Squeezes
1 - Knee Jerk Short Squeeze
Characteristics:
• Stock in Stage 4 Decline
• Longer term sellers in control
• Declining moving averages
• Rumor motivated, takeover, upgrade
• Violent upside brings in emotional
participants
• High likelihood of failure
• Guilty until proven innocent
[Link]
Short Squeeze Dynamics - Knee Jerk Squeeze
• Rallies in
Downtrends
Can Come
Quickly But
Typically Fail
• Stocks in
Downtrends
are “Guilty
Until Proven
Innocent”
• Always be
aware of the
next bigger
timeframe
[Link]
Knee Jerk Short Squeeze? SHAK
[Link]
Knee Jerk Short Squeeze
Rallies in downtrends can be violent but most of them get “snow packed” quickly
Stocks in Downtrends are considered Guilty until Proven Innocent!
[Link]
Short Squeezes
2 – Structural Short Squeeze
Characteristics:
• Longer term transition from Stage 1
Accumulation to Stage 2 Uptrend
• Above rising moving averages
• Shorts in real trouble as buyers gain
control of long term trends
• Fear of unlimited losses
• Stock is “Innocent until proven
guilty”
[Link]
Structural Squeeze - BA
Structural Squeeze- LRCX
[Link]
Structural Squeeze Potential- FEYE
[Link]
Structural Squeeze Potential- CARS
I would be nervous if I was short
[Link]
Risks In Short Squeeze Candidates
• Short sellers aren’t stupid
(especially in biotech stocks)
• A lot of assumptions in data due to
staleness
• We don’t know if the position is
hedged or part of a more complex
position
• Mitigate Risks with options
strategies, position size, etc.
• Job number one is always to
manage risk!
[Link]
Thank You for Attending
Thank you to Trade Ideas
Follow Brian on Twitter @alphatrends
Technical Analysis Using Multiple Timeframes
by Brian Shannon is available exclusively on
[Link]
