Bottoming Patterns - Accumulation Volume - Short Squeezes - (MAY 2020)
Today we're going to review a home run trade we made on $CAR! We will review what set this trade up, the three major contributing factors (Bottoming pattern, Accumulation Volume, and Short Interest), and how these factors played a major role in this explosive short-term move! We will also do a short video review of the bottoming formation, additional education will be provided within the short video.
A quick link to the video can be found here: Art of Trading - Trade Review
Calling a 'Top' or 'Bottom' in the market is a very difficult task. As with most tops, stocks usually go much higher than you think, and the same can be said about bottoms. Stocks can stay oversold and continue to stay oversold longer than what you think may be rational or even possible. Today we're going to focus on the technicals behind spotting and trading bottoming patterns; what to look for and how to trade them! This has been a common theme for AoT lately - Bottoming patterns, with stocks such as $CAR, $CAKE, $SAVE, and $DENN to name a few. With most technical setups, the setup provides the trader with a series of signals and technical occurrences than tend to repeat themselves time after time. $CAR, $CAKE, $SAVE and $DENN were all perfect examples of this.
These stocks had all the same characteristics:
1: Steep, fast, almost irrational types of sell offs.
2: A series of higher lows and higher highs.
3: Accumulation volume patterns on the green days.
4: Low volume sell offs on the red days.
5: Very high short interest.
The first common occurrence that has a tendency to repeat itself in bottoming patterns is accumulation volume. What is accumulation volume? Accumulation volume is also known as "Institutional Accumulation" or "Institutional Buying". Institutional investors are what's known as the "SMART MONEY". These are the highly paid individuals who roll up their sleeves and do thorough research about the companies they're about to invest money in. Keep in mind, these people aren't investing a few thousand dollars, they're investing millions and sometimes even billions in some of the companies they decide are worthy. When the Smart Money "click the buy button" their footsteps can be clearly seen via the VOLUME of shares traded on that specific day. The "Smart Money" know things most of us retail investors don't. So, when they are showing huge interest in a stock/company you better pay attention!
These Smart Money investors or "whales" as Bud Fox called Gordon Gekko in the famous movie "Wall Street", are usually the big Hedge Funds, Mutual funds, Pension Funds, Warren Buffet types, etc. When these people decide to buy a stock, the stock will move and usually move in a big way and volume will surely increase in a dramatic way as they gobble up large portions of a company's outstanding shares and that automatically drives up the stock price, while simultaneously showing a heavy increase in volume traded. When Institutional investors buy a stock, often times, the stock will rise and, in some cases, rise sharply over a sustained period of time. This phenomenon is also true on the SELL SIDE (aka 'Distribution Volume').
What are you looking for when it comes to “accumulation volume”?
What you want to see is a big increase (at least double or triple average daily volume) in VOLUME traded as the stock price ramps up. This is especially powerful thing when we see "accumulation volume" take place over a sustained period of time, like say over a few days, weeks or even months.
Let’s review the accumulation volume patterns in the $CAR daily chart! Our first “clue” to the bottoming pattern!
You can clearly see the accumulation volume days marked in the chart with the BLACK ARROWS above the volume bars. See how clearly defined and “easy” to spot these volume patterns are? Also note, on the sell off days the volume tends to be much lower. This is an important point because that generally means the “whales” that are buying these shares on the green days are holding on to them on the red days, and for good reason!
The next job for you as a trader is to look for your second clue. Short Interest. What is Short Interest and where do I find that information? Short Interest is a defined as the number of shares sold short but have not yet been covered. Short Interest can be defined as the actual number of shares sold short or a percentage. I like to look at it as a percentage. The higher this percentage, the more likely you’ll see sharp, quick rises in the stock price if the stock breaks out from the bottoming pattern (Short Squeeze). Stocks with small floats and high short interest have the highest probability of short squeezing as the shares to sell short become reduced. A high percentage short interest (30%+) can be fueled by the “whales” betting against the stock. As the stock price increases the “smart money” wants to cover their positions. A breakout in the stock price can be amplified by the “whales” covering their massive positions both pushing the average daily volume and the buying pressure. These squeezes can lead to 10% - 15%+ daily moves. Much like what we seen in our $CAR, $CAKE, $SAVE and $DENN trades – massive daily moves on volume – Short squeezes!
Great, but how do I find Short Interest of a stock?
I like to use www.finviz.com to find these numbers. Its easy to do – here’s how:
1. Go to www.finviz.com
2. On the home page search your stock symbol, we will use $CAR for example:
3. On the stock symbol page, you will find a spread sheet with the information you need:
The short interest is listed as "Short Float" defined as a percentage (Highlighted Yellow box)
And that's it, It's really as easy as that!
Now with all of this information in hand let's look at how the bottoming pattern formed and how our trade played out!
Follow the educational video for this portion of the trade review!
Here is a quick recap of the bottoming pattern, short squeeze trades we did recently.
$CAR
Entry: $15.13 - May 20th / 2020
Exit: $19.00 Average - May 26th / 2020
$CAKE
Entry: $23.15 – May 27th / 2020
Exit: $29.05 – June 5th / 2020
Again, notice the common theme? Huge sell off, a series of higher lows, followed by accumulation volume! A perfect recipe for a massive short-term move! We had to be very patient with cake in order to realize this move – patience pays!
$SAVE
Entry: $14.18 – June 2nd / 2020
Exit: $25.40 – June 5th / 2020
$SAVE! This was the biggest trade to date for AoT! A MASSIVE 63% gain in 3 trading days! See the massive accumulation volume in this one? 30 – 40 million shares a day for a notably long period of time! Then on the breakout we see 60 million shares push through the tape into a MASSIVE 100 million share day! This sort of action is from the “whales” we talked about earlier in this post!
$DENN
Entry: $12.15 – June 3rd / 2020
Exit: $14.70 – June 5th / 2020
$DENN proved to be another short term, big mover! See if you can spot the accumulation volume in this chart! Also note the higher low right before the breakout. These patterns often make higher lows quite similar to the one seen in this chart right before their big move.
P&L recap based on $10,000 entry size per trade:
Notice how all of the charts we traded and covered in this trade review were strikingly similar, They had many of the same characteristics!
LEARN TO SPOT AND TRADE THESE PATTERNS!
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