Short traps on rigged stocks, part two

This is a continuation article to the 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 unnecessary 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 in 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 a denser cluster of plays at the last 3 hours before market close. Something that traders should be aware of (1 PM - 4 PM 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 a 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-extended), 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 huge % on a day and a Type 1 trap. For example, tickers that move 500+% on a day will have a lesser chance of forming a 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 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 guess, but what matters is that data suggests that Type 1 is unlikely to be set on tickers that have moved very high % through 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, a trader should not even be thinking of potential Type 1 play since, without this variable, there is not enough dense short liquidity to squeeze.

Generally, the rule is that the less lengthy the consolidation, the more likely it is that the rigger will stuff HOD clearout quickly and rotate price down. While 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 on smaller structure (less time); the aim is just a stop hunt of stops that sit above the major highs. In contrast, on lengthy consolidation, the aim is two-fold: stop the hunt, and the 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 the 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

Many Type 1 clearout traps have flat demand levels with even or higher lows, especially on smaller float tickers. The rigger would be interested in soaking as much float as possible and letting other long traders help achieve a float rotation task. 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 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, so 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. The ticker on an average day does not trade any volume, which means that the 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 an exclusion variable. Just because lows are not holding well, it does not disqualify structure for a 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 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.

The majority of A-grade Type 1 clearouts have this variable present. This also allows traders to better time the long entry, with rotation of the first higher high often being the leading indicator for potential squeeze initiation.

The psychological component of aggression

One component that pretty much all targeted short squeezes share is the strength of the move, at which price moves 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 prolonged 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 a 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). 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 a certain conviction behind the thesis; whether justified or not does 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 bear 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 the mental aspect, it is much easier to do so since the thesis is grounded on much more conceptual aspect, and especially since in the 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:

Psychological 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 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 most short sellers to exit needs to be at the most aggressive move. This allows the rigger to be 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 and 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 is that in the majority of cases if it comes near HOD (on strong push), it will take out HOD; thus, a 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, the good idea is to focus on time and sales window/tape around the 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 to 5k+ order size on time and sales so that only the key players are visible. The size will depend on the liquidity on the asset; on a lower liquid asset, 3k is enough, on a very high liquid asset that traded 50+ mil of volume on a day, it will be required to place an 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 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 an example of a 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 relative terms about the average traded volume inside the 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 key variable that traders should be paying attention to is an initiation for a targeted short squeeze. In most cases, this will be a very notable high volume push where the riggers basically use a market to remove any offers insight and fill as much size as possible at the lowest price level to have a better price to unload higher price later HOD clearout.

The sooner one can spot this initiation as a trader, the quicker one can participate long (or cover short without taking a loss). This is perhaps the most critical part, allowing one to time the entry well (with not much drawdown). Because generally, a trader could 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 and a lower win ratio. The better, much more accurate aspect is to wait for the initiation and only start basing long trade there.

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

Two different approaches outlined below:

This is not to say that one method is good and the other is bad, both approaches can provide an 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 the right has a win-win method, as it extracts more R and it also 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, 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 the ticker is on the backside, such as the example below on CREX. In such case, a 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 the 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. This pushes short-sellers into "throwing in the towel" and giving up on short thesis, while longs are lured in at high prices. This kind of mentality is what riggers aim for when it comes to pop above HOD to set a trap.

Not all Type 1 clearouts deliver fade.

Generally, trading the 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 a trial and error approach and requires the trader to have well-managed entries and the right risk 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" stand for?

The word targeted is 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, it might sound out of place; it is absolutely not.

The fact is that large players within this field use many different cards they pull out of sleeves to liquidate the counter order flow of traders for their own benefit. This makes such moves "targeted" as they are intentionally pushed by either a single individual rigger or a group of traders to achieve their goal. Their goal might be short term as described above, or it might be a 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 can potentially trade with an edge since the key player will usually reveal itself. In contrast, on organic short squeezes where longs slowly squeeze out, shorts are much harder to time on both the long and short side since there is no intent from a large group of traders, or at least it is not possible to create a cohesive action plan in such case especially if the asset is trading on high volume. All of the examples laid out in 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, 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 a 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 to geostrategic relationships between countries when it comes to competition or conflicts. Do not reveal yourself to be the competitor unless you stand to get an advantage from doing so. Remain deceptive else.

Basically, the key concept that traders should always be on the watch for when it comes to Type 1 clearouts is 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 the rigger wants short sellers to start covering, there has to be the presence of strength on the tape and chart, which means that the rigger stands advantage by revealing himself at the right moment. It goes to the point above that most short squeezes are on very strong pushes, which 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 the ticker had no strong frontside leg within the market open (9:30 AM) towards 1 PM, Type 1 or Type 4 clearout chances 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 such a case.

If the ticker could not 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 keep dropping or 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 below 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 are especially easier to identify for potential squeezes since volume can be better than the float for where the float might rotate once it exceeds float at 1.5 or 2.00.

Scenario 1: If a 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 the low float ticker had established solid, dense consolidation through few hours, the squeeze chances increase drastically towards the later part of the day.

The idea behind this is how close 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 the ticker does not get any solid bid through 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 a solid backside, and any chances for Type 1 or other short squeeze attempts are slim. This is basically a decent way of how traders can reverse-engineer counter variables and stick in short positions 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 a role in traders thesis if the float is small, which allows the trader to "count the cards," however, if the float is high, a trader should neglect it and rather 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, a 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 traders should pay attention to. 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 for 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 most 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 the 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, there will be some strong push in front of every rigged shelf, whether it is 1 single strong bullish candle, a strong impulsive leg consistent with many bullish candles, or a full front side move. The majority of shelves that do matter and are set by riggers are after a 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 short covers participate, allowing the rigger to unload size into a squeeze or consolidated shelf. But the point should be that it is not for traders just necessarily to anticipate the shelf and trade it ahead, but rather to wait for it and trade after the shelf is clearly present. The usual duration for the shelf to form will be 5-20 minutes (the shelf is strictly measured from a 1-minute time frame or lower).

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

One statistically relevant variable that matters to point out is that if there is a shelf formed after successful HOD clearout, this will 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 micro shelf followed by rug pulls afterward on ENZ:

Demand wash with quick reclaim

Another key variable to keep an 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 always be present 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 into 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 the 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 sides in relatively nicely timely packed duration (2-3 hours).