The Search for the

‘Holly’ Grail

Brian Shannon @alphatrends

www.alphatrends.net
Sunday October 1, 2017
 Man vs Machine?
or
Man AND Machine!

www.alphatrends.net
 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
www.alphatrends.net
 1 - Who Is Holly?
www.trade-ideas.com

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

www.alphatrends.net
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!

www.alphatrends.net
2 – Market Structure Review

www.alphatrends.net
 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

www.alphatrends.net
 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)

www.alphatrends.net
 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

www.alphatrends.net
 Selling Short
Don’t get caught in the emotional cycle

Same emotions for short sellers but at opposite times than longs

www.alphatrends.net
 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

www.alphatrends.net
 Selling Short
Identify the trade candidate on a larger timeframe

www.alphatrends.net
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

www.alphatrends.net
 Selling Short
Plan and execute the trade on an intraday timeframe

www.alphatrends.net
 Short Selling
The two timeframes together
PLAN on the longer timeframe Execute & manage risk on shorter timeframe

www.alphatrends.net
 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

www.alphatrends.net
Risk Management is Job #1!!
 Selling Short
We manage risk by lowering stops to just above the most recent & relevant lower high

www.alphatrends.net
 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

www.alphatrends.net
 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 www.nasdaq.com www.finviz.com www.shortsqueeze.com

Significant lag time between settle date of trade and when numbers are publicly reported
www.alphatrends.net
 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

www.alphatrends.net
 Short Squeezes

Short interest ratio can change without a change in number of shares sold
short because the average volume may change
www.alphatrends.net
How accurate is the short information as reported by
regulatory agencies?

“Markets can remain irrational longer than you can remain solvent.”
~John Maynard Keynes
www.alphatrends.net
Daily Short Trading – More Active Than Most People Realize!
www.shortvolume.com

www.alphatrends.net
 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)

www.alphatrends.net
 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

www.alphatrends.net
 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

www.alphatrends.net
Knee Jerk Short Squeeze? SHAK

www.alphatrends.net
 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!

www.alphatrends.net
 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”

www.alphatrends.net
Structural Squeeze - BA
Structural Squeeze- LRCX

www.alphatrends.net
Structural Squeeze Potential- FEYE

www.alphatrends.net
Structural Squeeze Potential- CARS
I would be nervous if I was short

www.alphatrends.net
 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!

www.alphatrends.net
 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
Amazon.com