In my morning SteadyTrade Team webinar a member asked why short squeezes like AeroClean Technologies, Inc. (NASDAQ: AERC) work so well in the afternoon.
To understand why it works so well on the long side, you have to understand the short-selling strategy that creates the move…
The parabolic short strategy is obsolete. (SteadyTrade Team members can learn more about shorting strategies in this webinar.)
But apparently, shorts don't know that… Because they're still getting blown up trying to use this strategy. AERC proves my point...
Anyways, with the parabolic short-selling strategy, you take a short position based on the thesis that the stock will keep going higher.
Confusing, right? If you use risk management, it makes no sense… (which is partially why it's obsolete.)
But the idea behind it is that you're shorting it with a plan to add higher. Essentially, you're scaling into a short position.
So when a stock like AERC starts to spike as it did on Monday, you might short 100 shares at around $3.50. Then you might add 100 shares at $4, and more at $4.50 … You can see all the long top wicks on the chart…
AERC chart: June 2, 2022, 2-minute candle — courtesy of StocksToTrade.com
Because the more parabolic — meaning straight up — a stock goes, the more shorts think it will pull back really hard and they can buy to cover to get out. Then they'll make bank bro, and they can brag to all their friends.
The problem with that is, in the post-2016 world shorting is an overcrowded strategy. Stocks don't pull back like they used to. Instead, they consolidate sideways.
And shorts add into any pops. Just like they did on day one in AERC.
Then when the stock opens red the next day, they think they've got the trade in the bag. And they start hammering it even harder…
Now, the shorts are in full size. They've maxed out their buying power and margin…
The trade idea worked out even better than I anticipated…
If you would've taken a $1,000 position at my target entry, you could've sold an hour later and made roughly $700. If you held another hour, you could've made over $1,100 — that's double your money!
Even if you were conservative and traded my idea to a T … You still could've made almost 20% on your trade. Not bad for a so-called 'ugly market.'
Moves like this happen over and over again because of all the reasons I explained above...
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