The market has been on a roller coaster ride over the last few sessions. Fears of inflation creeping back up and worries that the Fed might not cut rates have weighed heavy on stocks.

And while that doesn’t currently boast well for buy-and-hold investors, this market is phenomenal for active traders.

In fact, just yesterday, I had one of my biggest gainers of the year, scoring a massive 1,130% winner in the ticker symbol RILY, turning $65 into $800 in just two days, live in my Daily Profits Live Trading Room.

So what exactly caused the move, and how can you prepare to take advantage of plays like this in the future?

That’s what I’ll be discussing with you today.

Before today, the market was picking up momentum after some oversold conditions. And I was looking for some stocks that have the potential to squeeze.

One of the main reasons RILY caught my attention is because the stock had a heavy short interest.

At the time I placed the trade the short interest in RILY was 75%, after yesterday’s monster rally, it has come down to 65%.

Let’s break it down step by step.

Short Interest: In the stock market, when someone believes that a particular stock’s price will decrease, they can engage in what’s called “short selling.” Here’s how it works:

• They borrow shares of a stock from someone who owns it (typically through their broker).
• They sell these borrowed shares on the market at the current price, hoping to buy them back later at a lower price.
• If the price does indeed drop, they buy back the shares at the lower price and return them to the lender, pocketing the difference as profit.

High Short Interest: This simply refers to a situation where a large number of investors are engaging in short selling for a particular stock. So, a stock with high short interest means that there are many investors betting that its price will go down.

Short Squeeze: Now, imagine the opposite happens – instead of the stock price going down, it starts going up. When this occurs, it puts pressure on short sellers. Here’s why:

As the stock price rises, short sellers start losing money because they sold shares at a lower price and need to buy them back at a higher price to return them.

Short sellers may start feeling the heat if the stock price rises significantly. They might cut their losses and buy back the shares they borrowed before the price goes even higher.

When many short sellers rush to buy back shares to cover their positions (known as “covering their shorts”), it creates additional demand for the stock, further driving its price up.

This sudden surge in buying activity, especially from short sellers trying to exit their positions, can lead to a rapid increase in the stock’s price, called a short squeeze.

If you don’t know the story, RILY has been under attack by short sellers, alleging the company committed fraud.

The stock declined from its last year’s high of $91.24 down to a low of $14.26 in February.

So what caused the spike yesterday?

The company filed its annual report, it showed minimal adjustments to its financial numbers. More importantly, the company confirmed by a second law firm, there was no wrongdoing.

That news sent the shorts scrambling, pushing it to a high of $35 yesterday.

Below you can see my pre-market plan I posted in the Daily Profits Live Trading Room:

Last Word

It’s hard to trade successfully if you come in with a bias. RILY was attacked by shorts for months. However, I let the price action and the chart dictate whether or not I should take a position.

As retail traders, we don’t have access to the same information as the pros on Wall Street. That’s why it’s critical that we base our decisions on price action.

For example, I had no clue that RILY would be releasing their annual report yesterday, but on a risk vs. reward basis, the trade made sense to me.

When you do follow the price action, sometimes you “get lucky.” I can’t tell you how many times I have bought call options on a strong chart, only to see the next day the company catches an upgrade from a Wall Street firm, sending the stock soaring.

It’s earnings season now, and I expect a lot of opportunities to open up. I’ll be live in the Daily Profits Live Trading Room, walking subscribers through the action and pointing out the trades I’m taking.

I share the same strategies that I used to turn $37,000 into $2.7 million within four years.

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