Days to Cover Squeeze Setup

Entry Logic

• Exact Entry Trigger: A stock with high short interest (>20%) sees its Days to Cover ratio climb above 10.
• Confirmation: The stock price starts breaking a multi-week downtrend line on increasing volume.
• Timeframe: Daily chart for the signal, 240-minute (4-hour) for a refined entry.
• Location Context: The stock is attempting to form a base after a prolonged decline.
• Market Condition: Neutral to bullish broad market.

Exit Logic

• Profit Target(s): Initial target is a 25% gain, as short covering can be explosive.
• Scaling Out: Sell 50% at 25% gain, then trail the remainder with a 20-day EMA.
• Trailing Stop: A close below the 20-day EMA after the initial target is hit.
• Signal Failure: The stock makes a new 52-week low.
• Opposite Signal: A significant increase in short interest, indicating shorts are adding, not covering.
• Time Expiration: 3 months.
• Momentum Loss: The stock stalls for 2+ weeks after the initial pop.

Stop Loss Structure

• Hard Stop: 12% below the entry price.
• Soft Stop: A close below the low of the breakout candle.
• Maximum Dollar Loss: $1200 per trade.
• Maximum Percent Loss: 12% of the trade value.
• Structural Stop: Below the entire consolidation base.

Risk Management Framework

• Risk Per Trade: 1% of account capital.
• Maximum Daily Loss: Not applicable.
• Maximum Weekly Loss: Not applicable.
• Maximum Drawdown: 20% of the account.
• R:R Requirement: Minimum 2:1.

Position Sizing Model

• Sizing Approach: Use smaller (e.g., half) position sizes due to the inherent volatility.
• Volatility Adjustment: The setup itself implies high volatility; size is pre-adjusted.
• Conviction Sizing: A+ setups (Days to Cover > 15, plus a catalyst) can use a 75% size.
• Scaling In: Not recommended.
• Scaling Out: As per the exit logic.

Trade Filtering

• Market Conditions to Avoid: A deeply bearish, risk-off market.
• Specific Setups: Look for a fundamental reason for the shorts to be wrong (e.g., unexpected good news).
• Instrument Requirements: Avoid companies with existential solvency risk.
• Time Restrictions: None.
• Chop/News Avoidance: Be aware of upcoming earnings reports.

Context Framework

• Trend Direction: The trade is a bet on a trend reversal from down to up.
• VWAP Relationship: Price will be well below the annual VWAP.
• MA Relationship: Entry will likely be below the 200 and 50 SMAs, but the goal is to capture the move back toward them.
• Range Location: At the low end of the 52-week range.
• Higher TF Alignment: Not expected; this is a contrarian setup.

Trade Management Rules

• Breakeven: Move stop to entry after a 15% gain.
• Scale Out: Take profits aggressively into the first major squeeze pop.
• Add Size: Not recommended.
• Fast vs Slow Moves: Expect a fast, vertical move. Do not chase if you miss the initial entry.

Time Rules

• Optimal Window: When the signal appears.
• Times to Avoid: Entering right before a known negative event.
• Session Notes: The squeeze can be triggered at any time by a news catalyst.

Setup Classification

• A+ Criteria: Days to Cover > 15, Short Interest > 30%, plus a positive catalyst.
• A Criteria: Days to Cover > 10, Short Interest > 20%, and a technical breakout.
• B Criteria: High Days to Cover but the chart is not yet showing signs of a bottom.
• C Criteria: Avoid.

Market Selection Criteria

• Instruments: Common stocks.
• Volume/Liquidity: Must have enough volume for shorts to feel trapped (e.g., >500k ADV).
• Volatility: High.

Statistical Edge Metrics

• Expected Win Rate: 35-45%.
• Average Win Size: 40-80%.
• Average Loss Size: 12-15%.
• Profit Factor: 3.0+.
• Expectancy: Very high due to the explosive potential.

Failure Conditions

• Market Conditions: The short sellers are correct, and the company's fundamentals deteriorate further.
• Specific Scenarios: The company dilutes shareholders with an equity offering, relieving the pressure on shorts.

Psychological Rules

• Mental Discipline: Must be willing to take a contrarian position and withstand initial volatility.

Advanced Components

• Market Regime Detection: A shift to a 'risk-on' market can be the trigger.
• Filters: Scan for stocks with Days to Cover > 10 and price above the 20-day EMA.
• Correlation: Not a primary factor.
• MTF Alignment: Not applicable.

Location

• Where Strongest: In heavily shorted stocks that have been beaten down for a long time.
• Where Weakest: In strong, uptrending stocks.