Short Squeeze: why the market is storming for no reason
Market trends are most often based on logical mechanisms that can be traced. However, it happens that the situation develops contrary to all forecasts and scenarios. For example, a quote, which was moving without jerks, suddenly rises or falls sharply, creating a complete mess on the exchange. And then it just as suddenly returns to its original positions. Such an impulse is called Short Squeeze, which translates as short ignition.
The difficulty for traders in this case, is that this spurt is extremely difficult to trace – the tools of technical and fundamental analysis are virtually powerless here.
Most often, the Short Squeeze occurs when the market is stable and there are no prerequisites for a jump. Short Squeeze is caused by traders who play short positions and gain profit from speculative operations. Short squeeze is especially observed in case of large volumes on short positions. The fact is that all traders’ attention is focused on assets, which are often subject to serious corrections.The first prerequisites for the Short Squeeze occur when players, evaluating the instrument, believe that its price should rise soon, and begin to enter short positions, which becomes the driver for an increase in the number of transactions. Investors with large capital notice that the asset has become very popular and they actively buy shares to change the trend. Then the hopes of speculators, who play short, do not come true, and not to lose money they begin to close positions en masse. As a result, those traders, who were set on a trend reversal and did not close their deals, are forced to exit the situation thanks to a margin call. This, in turn, pushes the price up even more.
Speculators, which caused the Short Squeeze, take a wait-and-see approach until demand for the asset falls, and then try to lock in profits by getting rid of shares at high prices. After such actions, prices fall as quickly as they rose.
Unfortunately, it is almost impossible to predict the appearance of Short Squeeze, because its appearance is not subject to any logic or market mechanisms. However, there are signs that may indicate a Short Squeeze. It is observed in assets that have high liquidity and can be traded on short positions. In addition, Short Squeeze occurs when trends are long and when the price corridor is finally broken through. In this case, actively buying large amounts of assets, and the charts show the acceleration of prices.
However, it should be understood that despite these signs, the Short Squeeze may appear for no apparent reason, and one should be prepared for it.