How to Find Short Squeeze Plays

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With the stock market quickly approaching its post-financial crisis highs, you need to concentrate on finding trades that can deliver quick, powerful gains.

Your best option for finding these fast-moving stocks is by screening for potential short squeeze plays…

A short squeeze can be a catalyst for a huge breakout. A squeeze occurs when you have a stock that has attracted numerous short sellers. As the stock begins to move higher, more and more of these short sellers will hit their stops. This forces them to buy back their shares around the same time, quickly pushing the stock price up much higher. A good rule to remember is the higher the percentage of shares that are short, the stronger the potential squeeze.

Now that you know how a short squeeze works, let me show you how you can create a simple screen to find the perfect short squeeze trading candidates. My screen consists of only three simple criteria, so you should have no trouble creating your own using free tools available online.

Let’s get started…

First, I want to begin our screen using the Financial Visualizations site Finviz.com. [Note. I’m not affiliated with Finviz—nor do I receive any favors for sending you to their stock screener. I just think it’s a good free resource for building stock screens.]

Go to Finviz and select “Screener” from the top menu bar. This will take you to the main stock screen page where you can begin to enter the following criteria:

1. Search for liquid stocks.

You’ll only want to deal with liquid stocks when searching for potential trades. And that’s not just true for our short squeeze screen. You should always confine your searches to stocks that trade regularly. After all, the last thing you need is to get stuck with a stock that you can’t sell.

Under the main “Descriptive” tab in the screener, you should select stocks with average trading volume of more than 100,000 shares. This will weed out all of those low-volume stocks you’ll want to avoid.

2. Find the shorts.

Now it’s time to find the stocks with heavy short interest. Click on the “Float Short” tab and you will see a drop-down menu with plenty of choices. For this screen, we obviously want stocks with the highest short interest possible. Select “High (>20%)” and you’re almost ready to trade…

3. Pinpointing the best breakout candidates

Even after narrowing down our trading universe with the first two criteria, you’ll notice that you’re still left with a ton of charts to go over. Now, your mission will be finding the stocks in this group that are closest to breaking out.

For this final step, you’ll have to select the “Technical” tab from the filters menu:

From this menu, you can narrow your results to only the best performing stocks. I recommend starting with the 50-Day High/Low option. Select “New High” under this tab to pull up stocks making new 50-day highs. This should leave you with a manageable list of tickers you can examine for potential trades.

Here’s where a little bit of trading knowledge comes into play. After you make your list, pull up the charts for a closer look. Which ones are the closest to breaking out of a range? Are any of these stocks forming bullish patterns such as inverse head and shoulders or ascending triangles? If so, these are the names you should add to your watch list.

From here, all of your normal trading rules will apply. Don’t buy a stock simply because other investors are short. Wait for price and volume confirmation before putting on a trade.

One final thought…

As you’re trying out this short squeeze screen, don’t be afraid to experiement with different criteria. There are plenty of options for narrowing your search results. Finviz allows you to search for stocks that are above or below key moving averages, names that are green on the day, or even stocks displaying a particular pattern.

You can also sync your search with relevant market events. If biotechs names are breaking out one monrning, you can tailor your squeeze screen to only display stocks within that particular industry. It’s a simple and effective way to generate new trading ideas every single day.