Momentum in the market is one of my favorite setups to trade, and that momentum can come through short squeezes.
What is momentum? Momentum is typically a greater-than-expected move that occurs in an individual equity, index, or sector. The moves in individual equities, particularly in equities that can be more volatile, are generally bigger than what can occur in a sector or index. This is because a sector or an index is going to be a mix of stocks, otherwise known as an average with various weights, versus just one individual name. Greater than expected moves are backed by momentum. It’s that momentum that is one of the critical differentiators between a stock that is going to roll over after a move, and one that will keep going when it hits a target.
So, how do you identify momentum?
I use a combination of my favorite tools, including the TrendStrength Turbo candles, which identify the strength of the trend, plus greater than average volume per bar, the trend itself, and Fibonacci retracement and extension targets.
In a momentum move, you will see a strong, bullish trend, you will see price above neatly stacked moving averages (8, 21, 34 EMAs & 50, 100, and 200 SMAs), that typically has greater than average volume as it nears a previous high or extension target.
Of course, in any trade, traders need to have price targets. And, oftentimes, when those price targets are continually hit without stopping, investors will stand by in disbelief that a stock can keep going. Well, if you’re reading momentum, that is not the case. Because a good trader knows that even though a ticker that keeps going may be rare, it continues going because of momentum.
Check out these targets on the weekly chart of Nvidia below:
NVDA – Weekly Chart
Notice the variety of price targets I had that NVDA has already hit and continued through?
This is because the breach of each target just fueled the upward momentum. Can you see the bright green TrendStrength Turbo candles, along with the light blue volume dot on some of these candles? That means the move was occurring on greater than average volume. This is a key sign of momentum.
Additionally, on this chart, NVDA had wide range expansion candles near those price targets. That means that when NVDA made a target, instead of stopping, it actually demonstrated a high volume breakthrough on a greater-than-normal range. These signals are all very bullish.
High Short Float
A momentum move can occur without a high short float, which is a situation in which there is a higher than average number of shares outstanding that are held short. However, when it occurs, plus a high short float, or, at a time where traders are more short than not in the indexes, the momentum move can explode even further.
Take for example C3.AI Inc (AI)
This ticker has 28% short float, which is extremely high. Of course, it makes sense, because this ticker was at one point worth $183 a share, and traded as low as $10.16! However, it has shifted trends at those lows and due to the high short float, as it trades higher, traders are getting squeezed. This is why a momentum setup can be even stronger. When you have momentum, plus a high short float, this can make for some explosive trades as the ticker breaks through previous highs. As you can see with AI, this ticker is up about 20% today as short sellers buy to cover.
So, when people stand by in disbelief that stocks like NVDA & AMD keep going despite the standard reason, just keep in mind that this is because it’s a momentum move. Momentum moves make for some of the best trading! While they are, of course volatile, the greater-than-expected moves make for great options candidates, because you need tickers to move more than expected to capitalize in the options market.
A put/call ratio that is too high, plus a momentum move, is even sweeter.
Are you trading any momentum moves? Which are your favorites?