We’ve all come here for one reason: Getting Information on Stocks. With most marijuana stocks being considered penny stocks, there are many things that need to be taken into account because yes, they do have higher risk than something like Microsoft or Apple…at least during the early stages of development.
A lot of the risk comes from volatility in markets. At the drop of a hat a penny stock can explode 20, 50, 100, or even 300% within the matter of weeks or even days. The important part to pay attention to during times of increased volatility is the chart. Historic levels of support and resistance can shed some light on where there are strong points on the chart that show where a price could hold up…especially during times of a pull-back. The main point, as with any stock, is not to let emotion dictate the pace and think logically.
During times when you get a massive short squeeze and market makers basically need to give up and cover, the second day following a major squeeze needs to be followed closely. Unless there is another monster day of bullish momentum, there’s a good chance that short traders will short even heavier to attempt to make money back after losing “yesterday”. This could trigger some very volatile days to follow and many times, periods of pull-back. The major reason for the pull-back after such a big day has more to do with where the real “retail market” is.
Obviously a stock can’t go up every day and needs to consolidate but after such a big day on the day of a short squeeze, the market needs to find where the true retail channel is. The point is to stay calm, don’t let emotions dictate the pace. After you see such a big short squeeze, a healthy market will need to find its real base. Keep in mind that most of the time there is a short squeeze, there’s typically more buying coming from short traders and not necessarily retail buying directly. It’s normal to see a pull-back so it’s best to remain calm and pay attention to the historical levels of support and resistance.
For example if a stock is trading around $2.50-$3.00 consistently and shows clear resistance levels around $3, there’s a good chance that a short is beginning to build in that area. Now say a short squeeze triggers, and that stock has a move above $4; that big move doesn’t necessarily mean that the market is at $4, it could just mean that there wasn’t enough resistance to hold back the price during the time that short sellers needed to buy back shares to cover their short position. Keep in mind that shorting deals with borrowing shares and not borrowing price. What we mean is that if you short a stock, you essentially are borrowing a number of shares of stock and when you need to cover your short, you need to pay back those shares.
If you were short 100 shares at $2 and now the price is at $4 when you have to cover your short position, you would have been forced to pay double the price in order to pay back your position. This is why we say that a short squeeze doesn’t necessarily represent the true retail market. Again, there can be a lot of volatility following a short squeeze that includes panic selling and heavier shorting so it’s important to stay calm and pay close attention to the trend, sometimes cost averaging at lower prices, or even holding strong as another short squeeze could trigger. All things considered, the final decision is up to you but you should take into account these other factors especially when there is a giant spike in price and volume. A healthy market will not go up every day and taking advantage of the volatility can be where a lot of money could be made.