Trading The High Short Interest ‘Seesaw’

2020-06-23 | Simpler Trading Team

Indexes pushing toward and above all-time highs have traders clamoring for a piece of the action.

The frenzy is opening up opportunity in a fast-action setup: high short interest.

This environment is like two kids playing on a seesaw — one always goes up while the other always goes down. It’s an ebb and flow balance.

Then another kid (like a catalyst affecting the market) comes along and jumps on one side, sending the other side shooting higher.

There’s always buying and selling in the market… the ebb and flow.

But often a ticker will be shorted much more than expected.

This can be a newer company or a ticker hyped in the media that is near recent highs or new all-time highs.

This creates short interest which is measured by a percentage of the shares available in the ticker. When more than 10% — preferably 20% to 30% or more of the ticker is “held short” — that means a lot of money is betting on that ticker going down.

It can create a frenzy of short interest that actually drives the price up (like the kid jumping onto one side of the seesaw) before it falls — if it ever falls.

The setup in this situation is to go against the high short interest and BUY the ticker as the ticker surges higher and the shorts get stopped out.

The key is to identify tickers with a high short interest setup and then get in before the “seesaw” movement surges the highs.

From there the goal is to stay long in the trade while the short sellers rush to exit.

After the rush happens and the ticker price rises, the trade can be exited for a targeted profit. Or ride it out (according to an established risk tolerance plan) until the momentum fades.

We Saw: markets higher across the board — 

  • Tech-heavy Nasdaq hit all-time high
  • Reports of increased Covid-19 cases
  • Hints of markets set to sell

We’re Watching: staying bullish with a bearish mindset —

  • Staying long in e-commerce and streaming
  • Short squeezes firing and where to buy next
  • Whether “gap psychology” is in play

Learn more about navigating news and the markets — check out the Simpler Trading community HERE.