• Jan

Short traps on rigged stocks, part two



This is a continuation article to initial article about different types of short traps often present on small-cap stocks. The most common types of present clearout traps are Type 1 and Type 4 as those are where the riggers have the best control over their size/float, while the Type 2 and 3 are rarer. The focus of this article will be thus mostly on Type 1 and 4 clearouts/traps.


In my personal view, any small-cap trader needs to understand the concept behind Type 1 short trap since this is very frequently present and lack of understanding of such a trap might lead to un-necessary stop-outs frequently especially if one is often short biased.

This article will thus focus on Type 1 and expanding some of the explanations already given on the initial article.


Components of (ideal) Type 1 clearout trap (in order chronologically):


-High volume frontside (50-100% ramp)

-Consolidation with lower highs

-Aggression indication / initiation

-HOD clearout

-Microshelf

-Rug pull





Hour



It should be noted that Type 1 and Type 4 clearouts are present at any time of day, however there is denser cluster of plays at last 3 hours before market close. Something that trader should be aware of (1PM - 4PM NY Eastern time).


Strong percentage move on a day



Nearly all Type 1 or Type 4 clearouts share one common variable: 50+% move on a day. If short squeeze makes sense for riggers then short sellers need to participate, and nothing draws short-sellers together more as the strong % moves do. The stronger the move, the more value thesis-based short sellers will start to participate (over-extened), which is why the trader should start paying attention to potential short traps on the ticker that move strongly through the day and can hold the gains at the demand level relatively well.



Below is such an example for ticker ABIO where the ticker had rallied strongly through the day and held the gains over the Type 1 consolidation before the squeeze was initiated.



There is however a negative correlation between assets that are up very large % on a day and a Type 1 trap. For example, tickers that moves 500+% on a day will have a lesser chance of forming Type 1 trap, possibly because asset might be too expensive at higher prices for riggers to formulate a squeeze (relative to the amount of short liquidity that is participating) or perhaps there is just not enough time to consolidate such ticker for enough time to form a proper short trap, since tickers that are up 500% on a day, will generally achieve this towards later hours of the day (2 hours before market close for example). Whatever the reason is one can mostly just guess, but what matters is that data suggests that Type 1 is unlikely to be set on tickers that have moved very high % trough the day.


The most common data overlap where Type 1s are the most present is on tickers that moved 50-120% on a day. Important data for a trader to keep in mind for potential short trap expectations.





Time (established consolidation)



The first major component that has to be present for Type 1 clearout is established consolidation for at least one hour. Statistically the most common cluster is actually right around 3 hours. If there is no significant lengthy consolidation trader should not even be thinking of potential Type 1 play since without the presence of this variable there is not enough dense short liquidity to squeeze.


Generally, the rule is, the less lengthy the consolidation it is the more likely it is that rigger will stuff HOD clearout quickly and rotate price down. While if consolidation lasts for a long time there is much more short liquidity built into a structure that allows the rigger to unload much more slowly and patiently.




There are basically two different processes going on, on smaller structure (less time) the aim is just a stop hunt of stops that sit above the major highs, while on lengthy consolidation the aim is two fold, first is stop hunt and second is to collect covers over time slowly since there is more liquidity participating.


Example of quick stuffed Type 1 / 4 clearout with less than 1 hour of consolidation:



However those rules are not to be taken strongly on face value as there are more variables than just time of consolidation that affects how price might respond after HOD clearout, such example ticker MGNX (expectation would be for slower unwind, instead it was relatively quick):



And another such example on ticker PTGX (both MGNX and PTGX were Type 1 clearouts, sympathy plays):




Protect the lows / demand for easier squeeze



One of the reasons why many Type 1 clearout traps have flat demand level with even or higher lows is especially on smaller float tickers the rigger would be interested to soak as much float as possible and letting other long traders help to achieve of float rotation task as well. If lows break, longs tend to sell out which is why riggers will often protect the lows with bounce so that as many longs remain in-the-money which helps to lock the float and help with squeeze later on into HOD (since the targeted liquidity are short sellers and not longs).


The more demand that is baked into the ticker the easier it is to form a squeeze, especially if enough short sellers participate. However, there is also the other side of this story, if too many longs are in the asset the rigger might face difficulty squeezing as those in-the-money long traders might sell out as squeeze starts causing a barrier for the price to squeeze higher or rigger might be forced to soak up too much size at too high prices to keep the squeeze going. There is balance, and this is why the usual target for Type 1 clearouts is lower float tickers.


The higher the float the more of a problem might be for rigger (underwater supply from previous months, many long traders in the money through the day turning into sellers at high prices, etc...). Especially ideal tickers for Type 1 clearouts are those without overhead supply, where the ticker on average day does not trade any volume, which means that rigger has no risk of getting dumped from historical longs.


Example of such ticker that trade o major volume historically or did not had major volume day prior (GRNQ):




Example of ticker with well protected demand and squeeze with HOD clearout followed after it on MITT:



However it should be added that this is not exclusion variable. Just because lows are not holding well it does not disqualify structure for potential short squeeze. It is however variable that adds to higher grade opportunity.




"Protect the short sellers"



Lower highs. This has already been mentioned in the initial article. Lower highs project weakness, they ensure that short-sellers remain in-the-money for a large portion of positions which later on allows riggers to use this to trigger mass behavior when needed above the HOD level. It is the concept of giving a sense of false security to the short sellers.



Majority of A grade Type 1 clearouts have this variable present. This as well allows trader to better time the long entry, with rotation of first higher high often being the leading indicator for potential squeeze initiation.




Psychological component of aggression




One component that pretty much all targeted short squeezes share is the strength of the move at which price is moving to the upside once squeeze is in progress. And by strength, there are two components hidden within the word itself: time and quickness of progression upwards. Or to put it in simple technical analysis terms: strong bull candles.


One might ask, why is this needed? Why couldn't just targeted short squeeze be very slow and push the price to the highs over a few days and let shorts exit slowly over time?

Think of small-cap stocks as a game of hot potato. A rigger needs to ensure that liquidation on the ticker happens within as short time window as possible (1 day or less) and then to pass that hot potato to some other buyers as quickly as possible. All of those tickers are risky overnight holds after strong runs, due to dilution activities (offerings) and the ideal case is to squeeze short-sellers out of positions as quickly as possible. If they are not shaken out quickly, it starts to pose too much risk to the rigger (unless the rigger and company itself made a clearly defined deal).


Another point is purely a scare component. Once confident short sellers enter the market, there is certain conviction behind the thesis, whether justified or not does not matter. All it matters is at what price and what aggression would those shorts be willing to admit "failure" to the thesis and exit? Think of it this way, the slower and softer the price is progressing higher the more likely it is for the short sellers to remain in position (very roughly speaking, yes it is a generalization but bare with me, there is a point to it). The opposite of that is, the quicker and with stronger volume, the price is expanding the more likely it is for a short seller to get shaken out. Its all a mind game, in the physical world where the mind and body are connected to the thesis (for example sport) it is much harder to shake one out of the persistence due to many factors, while if the game is fully focused only on mental aspect it is much easier to do so since the thesis is grounded on much more conceptual aspect, and especially since in modern era of trading entering and exiting position is as easy to click a simple button, it adds to the issue.


Example of how aggression / speed / volume indicates reactions to short sellers (those who are underwater):




Below are three examples of short squeezes on strong moves, to get the point across on ticker DGLY:








Psychologycal scare X2 , the HOD clearout



Take all the above explained in and multiply it by two-fold, and this should shine a light on why just near and above the HOD level of ticker there will be the most aggressive and strongest push in the whole short squeeze leg.

If one takes 100s of cases of Type 1 clearouts, this is the overlapping variable with very high consistency and is by no means random. To ensure the panic covering from short sellers that last key component of price where rigger wants the majority of short sellers to exit needs to be at the most aggressive move. This allows the rigger to dense up the tape actions/reactions of short sellers to start unloading into those short covers the long position.


Think of it this way:




Example of strongest pop an highest volume right at the HOD level on ticker IMRN.



Example of large pop move above HOD on ticker VRM.



Example of large pop move above HOD on ticker CRIS.



This behavior is important for the trader to note for example if one is long and Type 1 might be in play, there is no reason to sell a long position if the price has not yet breached HOD. The reason being that in majority cases if it comes near HOD (on strong push) it will take out HOD, thus trader should remain in position and not sell at "resistance" but instead above it:




Again it should be noted, this behavior/approach is only applicable if Type 1 clearout is in play, not just in any general or random situation.


Often a good idea is to put the focus on time and sales window/tape around HOD level (5 minutes after initial takeout) to see if a large player is unloading. This might help formulate a better short thesis. Placing order filter of 3k ot 5k+ order size on time and sales so that only the key players are visible. The size will depend on the liquidity on asset, on lower liquid asset 3k is enough, on very high liquid asset that traded 50+ mil of volume on a day it will be required to place 8k order filter on time and sales window, since rigger will hold much larger size there.



High volume on the clearout for short participation




For A grade play, there should be a high volume breach of HOD (stop hunt+targeted push).

After this, the next component should be a stall of 5-15 minutes with some sort of a shelf. This is where it gets a bit more conceptual however, as in some cases the shelf might be wide, in some cases, it might be very tight, two different examples below:




Below is example of high volume clearout on ticker MIST:




Example of high volume clearout on ticker VXRT:



Again to note, high volume on clearout should not be measured with any fixed number (100k, 500k, etc), instead, it should be measured in relative terms in relation to the average traded volume inside Type 1 or Type 4 structure. The pop candle should have notably higher volume, or perhaps it should be the highest volume candle within the whole structure.


Ideally, to short the HOD clearout trader should have all variables lined up nicely:

-High volume pop under/over HOD

-Microshelf with at least 5-minute stall

-Price testing HOD level to the downside

-Rug pull is fast and with volume (once already in short position)




Start of initiation



One absolutely key variable that trader should be paying attention to is the start of initiation for targeted short squeeze. In most cases, this will be a very notable high volume push where the riggers basically just use a market order to remove any offers in-sight and fill as much size as possible at the lowest price level, in order to have a better price to unload at a higher price later at HOD clearout.


The sooner one can spot this initiation as a trader the quicker one can participate in long (or cover short without taking a loss). This is perhaps the most critical part which allows one to time the entry well (with not much draw down). Because generally a trader could just scale in slowly over time at lows or midpoints long position without really "listening" to tape or observing any initiations, but the problem is that such approach provides low risk-reward as well as lower win ratio. The better much more accurate aspect is to wait for the initiation and only start basing long trade there.

This is especially helpful approach for traders who do not form their long thesis from the fillings or higher macro agenda.



Two different approaches outlined bellow:



This is not to say that one method is good and the other is bad, both approaches can provide edge but with approach on left side trader needs some external thesis on why squeeze makes sense (front-running the rigger), some traders use the help of fillings to base such thesis.

The differences between both approaches only show that the method on right has a win-win method, as it extracts more R and it as well requires smaller stop loss. The premise behind tight stop loss is (at the midpoint of initiation candle) that if this is true initiation of riggers and short squeeze initiation then riggers should not let the price fade under their initiation. Basically large players often protect their entry price.


In some cases, initiations are very clear and stand out as very un-organic behavior of price, while in other cases they are not as clear to identify. Especially the ones easier to identify are where ticker is on the backside such as the example below on CREX. In such case trader should always ask him/herself, is this price action organic result of 100s of cumulative traders or is actually very un-organic and likely the action of a single player, since it does not make sense why many traders would all of sudden initiate long at the same time, on the backside? This is one of the key questions that is rhetorical.


Example of initiation start before the short squeeze fully took place on ticker CREX:





"Throwing in a towel"



The idea behind that strong pop move right around HOD as mentioned above is to cause maximum scare effect as possible and ensure that short-sellers collectively start exiting, as well as luring in chasing long liquidity, once "all highs are broken", which allows riggers to unload sized position at/around required price level.


Think of how certain short-sellers or buyers think. Once the HOD level is broken many will rationalize that now the chart is fully open and there is no further resistance above, meaning the price can go as high as it wants. This will cause the short seller to doubt his position while the long trader will be more strongly convinced that further rally is due to come. This pushes short-sellers into "throwing in a towel" and giving up on short thesis, while longs are lured in at high prices. This kind of mentality is what riggers are aiming for when it comes to pop above HOD to set a trap.





Not all Type 1 clearouts deliver fade



Generally trading long side of a targeted short squeeze is easier than trading the short side after the squeeze, because the rigger will reveal participation much clearer on the long side when he is accumulating. This makes shorting after HOD clearout more of trial and error approach and requires the trader to have well-managed entries and the right risk in order to come with a positive edge over 100 samples.


Example of Type 1 clearout where there was no direct fade after clearout, even though all conditions matched for it quite well, ticker CLSK:






What does the word "targeted" stands for?





The word targeted is a concept often used within military circles where a subject or object is taken under the aim due to certain actions. While it might sound very harsh to use such words within the trading industry and it might sound out of the place, in fact, it is absolutely not.

The fact is that large players within this field use many different cards they pull out of sleeves to liquidate counter order flow of traders for their own benefit. This makes such moves "targeted" as they are intentionally pushed by either single individual rigger or a group of traders in order to achieve their goal. Their goal might be short term as described above, or it might be slightly longer-term one, where their primary intent is to reach short term liquidation and then use that liquidation to carry move of price further to achieve the secondary achievement of whatever the agenda is (fillings/dilutions are often the case with certain close prices in mind).


Therefore the targeted squeezes are potentially to trade with edge since key player will usually reveal itself, while on organic short squeezes where longs slowly squeeze out shorts are much harder to time on both long and short side since there is no intent from large group of traders, or at least it is not possible to create cohesive action plan in such case especially if asset is trading on high volume. All of the examples laid out on this article are targeted.


Using (12 PM) time and consolidation or backside to determine to squeeze chances

if by 12 PM ticker is not holding the midpoint demand well the chances for squeeze are low, especially for Type 1 clearout. However, this does not apply for all traps evenly since some are set within shorter time windows (at later part of the day) where the 12 PM will not play a role.



No need to stay hidden




In trading when it comes to large players (initiators) the same rules apply as in geostrategic relationships between countries when it comes to competition or conflicts. Do not reveal yourself to be the competitor unless you stand to get advantage from doing so. Remain deceptive else.


Basically, the key concept that trader should be always on the watch for when it comes to Type 1 clearouts it the strength of initiative moves, on strong bull pushes which are out of the context of previous price behavior. The rigger will "reveal his hand" because he chooses to do so, as it stands advantage to the scare effect. This has all been mentioned above, if rigger wants short sellers to start covering there has to be the presence of strength on the tape and chart, which means that rigger stands advantage by revealing himself at the right moment. Goes to the point above, that majority of short squeezes are on very strong pushes and this is by no means just because short-sellers are covering at mass, there is a real buyer in between.




Using exclusion variables to define which tickers are much less likely to be under squeeze:



If ticker had no strong frontside leg within the market open (9:30 AM) towards 1 PM the chances for Type 1 or Type 4 clearout are very low or almost neglectable.

Use the above variable to guide if one should remain in a short position or add on the backside since squeeze chances do not favor in such a case.


If ticker was unable to consolidate with flat-lined demand for 30-60 minutes at any time of day the squeeze chances are low. Think of it this way, to squeeze short-sellers it is not enough for the price to just keep dropping or just keep ramping higher, it has to consolidate, this creates the density of short positions around key prices without them having a chance of exiting in gains or loss, which is required component of a squeeze. Tickers with longer-established consolidations favor squeezing much more as short-sellers are packed against each other at a similar price level. The more this effect is exaggerated the more likely the squeeze, the less it is exaggerated the less likely the squeeze. This is one of the key concepts to keep in mind.


The example bellow of dense consolidation with short sellers crowded, and non-crowded squeeze or slight uptrend.





Low float relation to volume and back / front side



Low float tickers especially are easier to identify for potential squeezes, since volume can be better compared to the float for where the float might rotate once it exceeds float at 1.5 or 2.00 ratio.


Scenario 1: If low float ticker is on the backside since open chances for squeeze decrease drastically after 1 PM.

Scenario 2: If low float ticker had medium demand participation with some decent bull legs or consolidations squeeze might be still in play

Scenario 3: If low float ticker had established solid dense consolidation trough few hours, the squeeze chances increase drastically towards later part of the day.


The idea behind this is how closely together are shorts packed and how much float has rotated within the equal price level.


A conceptual example of low squeeze chances and backside since open, or medium / higher squeeze chances base on price+volume performance:



Below is a typical progression of nano float ticker following scenario 1 as outlined above. If ticker does not get any solid bid trough the mid-day or earlier on the day, the chances for squeeze are that much lower. If there is no major volume many short sellers will be less inclined to participate (lowers squeeze chance) if not enough demand participates the float rotation also is less likely. This means that such nano float or microfloat tickers will favor the fade. Ticker KBSF for example:




Below is another example of scenario 1 where the ticker has solid backside and any chances for Type 1 or other short squeeze attempts are slim. This is basically a decent way of how trader can reverse-engineer counter variables and stick in short position longer as squeeze chances are smaller if Type 1 variables are highlighted.




Are short squeezes all about float rotation?



Not exactly. Yes in many cases, but not necessarily always. Some tickers squeeze short-sellers without rotating the float intraday. The float should play role in traders thesis if the float is small, which allows the trader to "count the cards", however, if the float is high trader should neglect it and rather just focus on other elements of potential Type 1 clearout such as liquidity volume, price structure, etc. But certainly, on small float tickers under 5 million float, it is possible to build a better thesis for short squeeze as float rotations do play a major contributing role to easier squeeze since the large player can lock the float easier (with less capital).


If float on the ticker is small trader should put a high priority on counting the volume over each section of time (5 minutes for example) if ticker trades on high volume as that variable is far more important than any indicator, fundamental thesis, or any other reason. High volume on the small float is perhaps the most important rug pull/squeeze variable that trader should pay attention to, and this is highly under-understood within the trading community of small-cap traders.


Think of float rotation in this way (on low float ticker trading with high volume) (game of hot potato until there are no more potatoes to go around and yet everyone still wants them):




Be wary of the shelf



Shelves are often a two-edged sword when it comes to low float or small-cap stocks, it is either a rug pull component or a continuation/squeeze, a trader should pay close attention to those. Mind that majority of Type 1 clearouts will form a shelf before the rigger fully unloads position and the cases where the stock pushes further higher or float rotates from the shelf it will be done in a similar matter but will be much rarer case. The cleaner the shelf ( symmetry, bounces, equal rejections) the more likely it is that a single player is behind it and something big is coming just around the corner, in the majority of cases as per data when such behavior is present there will be 2 R move coming (relative to shelf size).


One simple rule to remember: Pay attention to shelves only after strong pushes. Basically, in front of every rigged shelf, there will be some sort of strong push. Whether it is 1 single strong bullish candle, or strong impulsive leg consistent of many bullish candles or full front side move. The majority of shelves that do matter and are set by riggers are after some sort of strong un-organic move. Keep attention to that.


Example:



The shelf itself might or might not be present after a short squeeze. It generally depends on how liquid the asset is and how strongly are short covers participating allowing rigger to unload size into a squeeze or consolidated shelf. But the point should be that it is not for trader to just necessarily anticipate shelf and trade it ahead, but rather to wait for it and trade after shelf is clearly present. The usual duration for the shelf to form will be 5-20 minutes (shelf is strictly measured from 1-minute time frame or lower).


Example of shelf with fade after on ticker GRNQ (15 minutes shelf duration):



One statistically relevant variable which matters to point out is that if there is shelf formed after successful HOD clearout, this will then put a high chance of price fading lower after shelf and not rallying. Statistically, it happens much more rarely that price would rally from the formed shelf, especially if the tape is confirming large seller present. In more cases shelf results with fade instead (if it is well expressed).



Another example of ticker with larger microshelf followed by rug pull afterwards on ENZ:





Demand wash with quick reclaim


Another key variable to keep eye on is a strong wash of demand (with volume) followed by relatively quick reclaim. This is especially essential for Type 4 clearout and it will be present always for such a trap.


Think of it this way, would the general market all of sudden be inclined to long strongly just after the key support breaks? Unlikely. If such behavior is present it is the very likely single player behind the move, since the general market will either not be interested in long or will actually be short. Thus wash reclaim (around key demand location) gives solid insight on what might be around the corner. Mind one important thing, every Type 4 trap (95+%) has demand wash with quick reclaim present, which means that trader should put very high priority attention to this behavior!


Example of demand wash and quick reclaims just where the squeeze starts on ticker BMRA (Type 1 / Type 4 hybrid):




Type 1 and Type 4 clearout examples



Example of Type 1 clearout on ticker CETX:



Type 4 clearout on ticker SRNE:



Example of Type 4 combo clearout on ticker CAPR:



Example of Type 4 combo clearout on ticker SES:



(Side note majority of examples given are from month May and June 2020).




Conclusion



There is no secret that financial markets are manipulated to a large degree, but that is not a bad thing at its core since manipulated actions are far stronger and cleaner to extract edge from as compared to organic order-flow since a trader can lean on the back of strong individual player which is always more reliable compared to leaning on actions of 1000s of traders who form organic order flow and might be a lot more chaotic.


Clearout traps are especially great for trading because they allow extracting edge on both long and short side in relatively nicely timely packed duration (2-3 hours).



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