I love a good short squeeze.
A short squeeze is when a stock suddenly increases in price and causes short sellers to close out their positions — subsequently lifting the price even higher.
If you’re part of the short-selling action here, you better not be the last one holding the bag — you stand to lose everything.
Short squeezes can happen when a heavily-shorted stock releases bullish news or breaks above a key technical level, causing the shorts to run for cover.
On the flip side, short squeezes are a fantastic opportunity to grab profits by going long on a stock…
One of the very best market opportunities, in fact. They can explode a stock higher, with no end in sight.
Well, that’s exactly what happened with a trade I put on in Datadog, a monitoring service for cloud-scale applications.
Today, I want to walk you through the 80% win I took in the first half of the trade, and leak of few insights on what I’m eyeing for the remainder.
When I filter for my setups, I look for recent IPOs with a relatively high short interest. Thereafter, I look at the charts. Take Datadog Inc (DDOG) for example.
This stock has only 25.80M shares floating, and of those shares 16.75% are short. Generally, when I look for potential squeeze plays, some times, I like to get ahead of the potential short squeeze.
You see, traders typically consider a stock is a potential short squeeze play when it gets above 20%. However, a lot of the time, when it’s near 20% with a low float… we could see some small pops in the stock.
Now, I don’t just look for relatively high short interest… I also look at the charts. For the most part, one of my favorite setups is the “squeeze”. Don’t get this confused with the short squeeze, I’m actually referring to the TTM squeeze indicator.
Take a look at the alert I sent to my clients in DDOG.
I even attached a chart for my clients.
Check out the 78-minute chart in DDOG above. If you look at the overall chart pattern, the stock was trending higher and looked as if it could test its next level of resistance (all-time highs).
If you look below the candlestick chart, you’ll see annotation for the TTM squeeze indicator. Basically, once I saw the stock was moving higher, and the TTM squeeze indicator crossed above the zero line — it indicated positive momentum was in the cards.
I won’t get into all the minutiae about the TTM squeeze indicator (that’s a lesson in itself)… but all you need to know is when the indicator is green, the momentum color is shown in cyan… and it’s considered a buy signal.
On the other hand, when the bars turn red and there are two yellow bars in a row… it’s a sell signal.
If you can figure out the changes in the colors of the bars… trading IPOs becomes a heck of a lot easier.
In addition to the chart, I even provided a quick plan for my clients. Basically, I was looking for DDOG to get to all-time highs around $43.50, and if the stock closed below $39.30, I’ll stop out.
Guess what happened with DDOG?
The stock got right to my target… and the options exploded!
In just a short timeframe, I was able to lock in an 80% winner on half my position!
For the rest, I decided to let it ride… and I’m still in this position, and I’ll be sure to let my clients if I make any moves.
Right now, I’ll keep an eye on this play… but I’ll stop out of my position if the charts provide a signal. However, I won’t turn this winner into a loser, so I’ll have a stop-loss order in place.