Short squeeze stocks have become very popular among penny stock investors and for good reason. Because of penny stocks’ volatile nature it’s possible to find stocks with high short interest, but short interest alone is not enough for a short squeeze. Determining the likelihood of a stock becoming the next Reddit short squeeze play can be the difference between getting in at its peak or right before it takes off.
While it’s impossible to know what stocks will actually squeeze, we have a criteria which we use to determine if a penny stock is a good candidate or not. Using this criteria we alerted Redbox Entertainment Inc. (NASDAQ: RDBX)’s run from $2.62 to $18.21 in our free alerts room and have used it to identify other short squeeze stocks as well. To help you in your own due diligence, here is a breakdown of our criteria for analyzing Reddit short squeeze stocks.
Penny stock short squeezes typically originate on this platform because of the community of investors regularly posting new DD on potential plays. To understand whether a play has enough momentum behind it, it’s important to see how popular it is on these three subreddits:
If you see users posting or commenting consistently about one stock across these subreddits then that can be a sign to look further into the stock to see whether the data supports a short squeeze.
2. Fundamental Observations
It’s important to note that when considering a potential short squeeze stock, forward-looking indicators are typically more important than pure fundamentals. While many short squeeze plays have strong fundamentals that could make them a good long-term investment, if the goal is to trade a short squeeze then the priority should be on catalysts that reflect that.
With this in mind, the first step to researching the fundamentals of the company is to see if it is a scam – ie. if it has any credible operations of products.
That brings us to the float. For the stock to move quickly on its catalyst, it’s important that it has a low float. Not only will the stock be more volatile on lower volume, but if the stock has a float below 50 million shares, then it’s easier for it to be locked down by retail investors and institutions. Ideally, this will also help reduce the chances of sellers, killing the stock’s run.
5. Short Data
Of course, the main idea behind a short squeeze play is the short data. Typically we look at three numbers to understand the shorts’ position in the stock and see if there is a chance of forcing the shorts to cover.
Cost to Borrow (CTB): the higher the better but ideally 50%+
Shares On Loan: the higher the better, but 20%+ ideally
Short Interest: the higher the better, but typically 20%+
Other things to consider can be failures to deliver which is a sign of naked shorting or dark pool volume.
6. 52-Week Range
It’s also important to consider the range in which the stock has traded. If the stock is closer to the bottom of its range, then it indicates that there is less risk since it is already close to its historical bottom. But knowing how high the stock has reached is also important because it will give you an idea of the trade’s upside potential. On top of this, the 52-week high is a very important resistance which is useful for finding levels to trim at.
7. Reason for 52-Week High
However it’s not enough to just know the stock’s peak. In fact, it’s more important to understand the reasons why it reached that price in the first place. Once you’ve identified the catalysts which triggered this run, then it’s only a matter of research to find out whether the stock has similar catalysts on the horizon.
8. Analyst Ratings
Realistically, analyst ratings are not the most important factor for a short squeeze because analysts can be biased or very far off. After all, analysts typically do not lose their job if their ratings are off. But these ratings can be important since many investors do consider them as part of their due diligence and it can also give insight into what institutions are thinking.
9. Institutional Buys
Many investors use institutional buys as a sign of what companies could be good investments mainly because institutions legally have access to some types of inside information and also do high-level DD before investing in a company. Institutional buys are also important because institutions tend to hold their investments for long periods of time which helps lock up the float.
10. Insider Buys
Insider buys are positive catalysts across the board but for short squeeze stocks they can be even more important. Essentially, insider buys provide a window into what the company’s management is thinking. If these insiders are buying shares on the open market, then that’s a very bullish sign that they know something is happening that would make these shares a good buy at that price.
On the other hand, many investors worry about insider selling and while that’s something to consider if you are holding long-term, it’s typically not a concern for short squeeze stocks. After all, insiders may sell their shares for many reasons such as taxes, mortgage payments, or unexpected payments. However, there’s only one reason an insider would be buying shares and that’s to make money.
11. Technical Analysis
Some traders believe that technical analysis is irrelevant to short squeezes since momentum or volume is the real trigger. While that’s true to a certain degree, technical analysis is an important tool for finding possible entries, exits, and profit-taking.
Is it too Late to Enter?
In conclusion, you can use this criteria to decide whether it is too late to enter one of the popular Reddit short squeeze stocks or not. But be careful when playing options since liquidity issues can arise. Sometimes the price of the penny stock will move up, and call options will decrease in price because there is no liquidity, ie. not enough buyers and sellers. This is a common problem when the share price is low since most traders would prefer to buy shares since they are already cheap and offer a decent percentage gain. If you decide to play options anyways, ATM options are a better choice.
The key takeaway from this guide is that if you are looking to trade short squeeze stocks then you need to be realistic and not force your due diligence to match the narrative. Even if a penny stock does not meet all the criteria, that does not mean that it will not run. But the more positive indicators it has, the better its chances are.