Short selling is a strategy traders use to profit from a stock dropping in price. A short seller borrows shares of a stock today, immediately sells them and then hopes to buy them back at a future date at a lower price, in order to return them to the lender. The short seller keeps the difference in price as profit, but books a loss if forced to buy the shares back at a higher price.
Since short interest is a bet against a stock going higher, the number of shares shorted is commonly used as an indication of bearish sentiment toward a stock.
A short squeeze occurs when a highly shorted stock begins to move higher, putting pressure on the short sellers because they still have to repay the shares they’ve borrowed. As the short sellers close out their positions by buying the stock back, it creates a jump in buying demand. For this reason, it’s wise to watch for the signs of a potential short squeeze as this pressure builds.
The table below identifies 10 companies and exchange-traded funds (ETFs) that represent excellent potential for a short squeeze rally. Each stock or ETF is highly shorted and is currently trading above its 50-day moving average.
To increase the odds of finding short squeeze candidates, we filtered our short interest database further to include only companies whose 50-day moving average is trending higher. This sign of technical strength means the short sellers have sold into strength, a counterintuitive move that strengthens the contrarian implications of the short interest.