How "Short-covering" rallies really work:
1) Let's say, a lot of investors have taken short positions in a stock expecting its price to fall in the future due to some bad news
2) As time passes, the stock price seems to hold steady & doesn't show any signs of falling
(1/2) 👇
1) Let's say, a lot of investors have taken short positions in a stock expecting its price to fall in the future due to some bad news
2) As time passes, the stock price seems to hold steady & doesn't show any signs of falling
(1/2) 👇
3) As more time passes, these short sellers lose confidence in their initial idea of expecting the stock price to fall
4) They now decide to close their short (sell) positions. To close their positions, they have to buy the stock to square-off
(2/3) 👇
4) They now decide to close their short (sell) positions. To close their positions, they have to buy the stock to square-off
(2/3) 👇
5) This buying pressure triggers a massive demand in the stock thereby increasing it's price rapidly
6) Looking at the price go up, more buyers (fresh positions) join in taking the prices even higher
All this results in a massive up move known as a "short-covering" rally
(3/3)
6) Looking at the price go up, more buyers (fresh positions) join in taking the prices even higher
All this results in a massive up move known as a "short-covering" rally
(3/3)
