this week's lesson.
I want to start by analyzing $RKDA, which was a hot ticker that many of my students didn’t get an exact handle on.
Unfortunately, when people make their first mistake, they tend to make that mistake again on the same day. It’s easy to get carried away once you see that loss, especially if the ticker is still running, but when you’re working with a multi-day runner or a huge runner with tiny flow, like $RKDA, you must be careful.
Looking at the chart, $RKDA was trading huge volume on Friday that carried over to Monday.
People get too eager to short when they see a stock like this panic and gap-up, and they end up shorting into that panic as I did. I shorted near $3.05 as the stock panicked like a failed gap-up short right out of the gate. Once $RKDA cracked through the support at $2.73, it took only thin volume to almost gain 75% of the entire panic. Whenever you see a major panic with heavy volume such as 600,000 shares, that stock tends to come back with thin volume, and that’s when you should be aware of potential squeezes. As the stock reached $2.89, I began to cover my shares, which ended up being right before a huge spike went to $3.50.
In this situation, you have to clearly understand where the short seller is and the buyer is…
Because stocks with this kind of movement become very emotional with fast panics and spikes.
The stock first breaks the pre-market high and becomes a pre-market breakout while also breaking against gaining liquidity.
When a stock is gaining liquidity, more buyers are coming into play, so the stock tends to trade more volume than usual, and when you add low-float to the mix, the stock remains bullish for the rest of the day. Looking back at the chart, when we see a considerable spike, short-sellers are covering quickly due to the fear of another breakout. Covering the panic, though, causes buying pressure, and that pressure is what forms support for the chart. With spikes coming in fast, you can also expect to be halted, which means short-sellers are stuck and wanting out; that’s why panic can hold.
We can see the average shorts are around $3 when $RKDA starts to panic.
If I were short at, let’s say, $3.30, and the stock begins to panic at my level, then I would cut my losses and be done, but that’s not everyone’s first thought. The mentality of some may be to cut losses, and some people end up adding. Multiple times the stock panicked into the $3.70 area and held about five times because there are so many short sellers stuck in the lower $3’s. Because the stock doesn’t come back, people are still shorting or adding, which causes a multi-layer of short-sellers when you have people shorting around $2.20 and people who’ve already shorted at $3.