Short Squeeze Part II

As promised, and following on from PART I of a Short Squeeze, we have the sequel.

Like WOW — Where to pick this story up, so much has happened since our first posting only a few days ago and the Retail Raiders revolt against Wall Street has progressed beyond a trading phenomenon into perhaps one of the biggest financial markets stories of the decade.

This is a Black Swan in the making, and I very rarely label any risk with such a title, but the Wall Street Bets Movement threatens to Level the Playing Field or conversely destroy it entirely.

In my opinion, the war must rage on. We must widen the scope to drain the swamp from cretinously leveraged hedge funds, useless cronies, institutionalized corruption, misplaced compliance armies and lame financial education born in ivory towers away from the trading floor — the day of reckoning is rapidly approaching.

As bold as this statement is, it's unlikely to transgress in a positive way for the Retail Trading Community.

Personally, I usually stay in the technical space which is where I work as an occasional Squeeze Trader, although; Squeeze Trading is not my preferred trading strategy.

So with that, let's talk about the Short Squeeze first and then move back into the political sphere that has ensued as a consequence of what is normally a private affair between Squeezers and Shorters (see PART I for a more detailed explanation).

Short Squeeze Beginnings

The Squeeze to Trade Flow Dynamic can be represented in this single image I have shared below and moving from left to right, you have the Price Time Series Candle Charts that you would expect to see on any typical asset that is traded.

What gives this Price Signal an indication that it is in a Squeeze Zone is how the horizontal time series propagates.

Take notice that the time series is built up of tight equally-sized Red and Green Candles that go on for days. This all seems insignificant doesn't it, but this asset is trapped under high pressure at equilibrium as two forces push against it. Position flow enters the stock from the shorter trade corner only to be counterbalanced from the squeezer support cohort — The silent scream of a stock in this time-space continuum is normally only heard by Squeeze Traders.

Anyway, that's what a time series of a Squeeze Stock looks like, and it can go on for days, sometimes weeks caught between the faint horizontally opposed Keltner Channel lines (see the faint white dotted lines on the chart).

If the time series falls out of the Squeeze Zone, the Shorters will win and the price will fall away, often rapidly. However, if the time series presses past the top resistance line as it does in our chart shown below, Shorters Cover their losses by taking the other side of their trade and as they cross over into the light, the asset price will literally erupt like a volcano.

It can be quite enlightening to watch, even more so as your p&l dials up hundreds or thousands of dollars of Squeezer Profit in a matter of minutes, just like a speedometer on a car racing off from a traffic light. I can't really explain the feeling and remain polite; it's euphoric — I have been measuring my pulse during these moments, and well, we are working on that lol.

Please don't be concerned, I am centred here, and I am aware consistent winners need to keep trading behaviour and Risk Appetite emotionally and spiritually balanced. As I said earlier, Squeeze Trading is not my only or preferred trading strategy for various reasons which we can cover in another blog posting.

Martin's Trading Platform Configured for Squeeze Trading

To confirm the Squeeze play as a single indicator, traders configure their platforms to monitor stocks in Squeeze Flow Volume Dynamics using the TTM Squeeze Algorithm.

You can see my TTM Squeeze Line at the bottom of the chart "Squeeze & Flow Binary Indicator". Notice the Red Dots of Squeeze followed by a release of pressure or Flow when the Green Dots appear. They always say, don't trade the Squeeze, but this is exactly what Squeeze Traders do and the rest is history.

If all works out well (it's not always the case), Squeezers will pull their position to profit at the top of the pop as measured on the Fibonacci Extension Gauge (see the red bubbles on the left of my chart). In this case, the Trader Cohort pulled off early after which the stock will usually fall back into the Squeeze Zone to be put under pressure once more for another day of fun. In effect, the cycle starts over and sometimes a Squeeze Trader will have two or three runs out of a single window of opportunity.

So there you have it, unbelievable. How the heck could this arcane trading strategy turn into the fiasco we are witnessing between Wall Street Bets Retail Investors and the nefarious Hedge Fund community?

Vox Populi

Let me start by saying one of my biggest fears is not the collapse of an index, and history tells us that bear markets are an infrequent inevitability but also a storm that the patient can survive. They are an opportunity environment that allows traders to thrive, and how that is done is also for another blog posting.

With the GameStop Battle, we are facing a Tragedy of the commons where the actions of the masses don't fit the economic, market or educational constructs of normality that feed basic and prevailing opinions on just about everything we believe we know about commerce.

In the short of it (no pun intended), a cohort of retail investors (not all retail investors but an army six million strong) clambered on a multiweek short squeeze that was already playing out on GameStop. That is what happened, nothing more, nothing less. The retail mob justified their actions under the premise that "we're saving the small guy" or in this case GameStop and due to their numbers (a lot of institutions followed the tape), the hedge funds were quite simply caught off guard and not prepared for battle.

Worse, many hedge funds arrogantly saw these people as an ignorant pest and they dug their heels in to pursue deeper into their shorting strategy — That's foolish and in the end, those fund managers who were most pigheaded and adamant that they must be right, simply collapsed!

Great Insight from Chamath Palihapitiya CNBC Interview

How is it possible retail investors know more than accolade heavy economists, and how is it possible these Reddit Retail Raiders have beaten the fund managers at their own game — it shouldn't be possible I hear you say and the Chamath Palihapitiya CNBC interview above exemplifies exactly the argument I am putting forwards. It's a must-watch as it captures the essence of this whole dilemma.

WARNING | The CNBC reporter may not be able to see beyond the boundaries of Status Quo, but if you can handle the language, David Portnoy gets it and hits the mark with his colorful commentary [LINK].

What's amazing is that David Portnoy is an internet celebrity, not a markets guy specifically or banker or regulator but he can see the break of ethics that has transgressed this week as an outcome of how these different entities (traders ➜ brokers ➜ the exchange ➜ market maker ➜ market) works.

However, while David Portnoy and many other people believe Robbinhood is the bad guy here, they probably fail to see that all Robbinhood was trying to do was manage margin positions with their brokers. One of the easiest ways to do this is by governing their trader community's ability to go deeper on positions.

Now keeping an open mind here is key ➜ just because something shouldn't have happened (the rise of the sophisticated retail trader) doesn't mean to say that it's wrong, but it will challenge everything you believe you know to be right in the markets.

How will the regulators respond?

That is my biggest fear.