Pattern recognition is a crucial skill for day traders…
If you want to catch moves before they happen, you must recognize patterns, and then take your shot.
If you’re still new and learning how to recognize patterns — the good news is, they repeat…
That gives you plenty of opportunities to study these runners so you can memorize the pattern and what to look for.
And I’m helping you with that today…
I’m breaking down the pattern that sparked a 537% short squeeze to help you spot the next one!
The Pattern That Sparked a 537% Short Squeeze
MSP Recovery, Inc. (NASDAQ: LIFW) squeezed 537% yesterday after it crossed a key level and played out one of my top patterns.
Here’s how the day three pattern plays out and what it looked like in LIFW…
Day One: The Big Move
The day three surge pattern starts on day one with a stock that’s a big gainer, backed by substantial news.
LIFW started slowly grinding higher on October 26 after SEC filings showed the CEO scooped up almost half a million shares.
There was no press release issued, but StocksToTrade’s Breaking News Chat alerted the news that morning before it spiked 44%.
Once LIFW climbed over a few days, it had what I would call it’s first big green day as it squeezed higher.
From there it held its gains again and that’s a key component for the later surge…
Day Two: Setting the Trap
After a stock holds up on day one, day two is all about luring in short sellers.
You want to see the stock consolidate below the highs from day one where shorts will place their risk.
But you also don’t want it to break down.
You just want to see the stock consolidate in a channel for the day and have sideways action.
That sets the trap for the big squeeze on day three…
Day Three: The Breakout
The real action begins on day three (or later). When the stock breaks the highs from the previous two days, it’s off to the races.
This is the point where short sellers, who bet on a breakdown, are caught in a trap with no escape except to buy to cover.
That creates a flood of buy orders that send the stock soaring.
LIFW chart: 5-day, 5-minute candle — courtesy of StocksToTrade.com
You can see in the case of LIFW, the stock actually surged on day five not day three.
This is what I call a pattern variation…
The pattern isn’t about the specific day the stock moves — it’s about the chart pattern overall and the price action.
See how Bryce Tuohey explains it in the video below…
As long as a stock has a big green day and then holds up and consolidates sideways without breaking down … The surge can happen on day four, five, or even six…
The key is to learn to recognize a chart as it’s setting up for this potential pattern.
Look for a big day one move followed by a day or more of consolidation to lure in shorts. Then watch the stock to break the recent highs and squeeze higher.
Here’s what it looks like on the daily chart…
LIFW chart: 3-month, daily candle — courtesy of StocksToTrade.com
As you gain experience, recognizing these patterns will become earlier.
You’ll be more prepared by having these recent runners on your watchlist, and you’ll be ready to make your move when your entry signal is triggered.
Join us for live training sessions to help you get your trading on track — register here for free now!
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade