What is a Long Squeeze
A long squeeze, which involves a single stock, occurs when a sudden drop in price incites further selling, pressuring long holders of the stock into selling their shares to protect against a dramatic loss. Less popular than its more famous brother, the short squeeze, long squeezes are most apt to be found in smaller, more illiquid stocks, where a few determined or panicking shareholders can create unwarranted price volatility in a short period of time.
BREAKING DOWN Long Squeeze
Short sellers can monopolize the trading in a stock for a brief period of time, creating a sudden drop in price. The main reason long squeezes are so rare is that value buyers will step in once the price falls to a point deemed "too low," and bid the shares back up. A rapidly falling stock, without a fundamental basis for the drop, will soon be seen as a "value" play, but a rapidly rising stock will be seen as increasingly risky with every upward tick.
Value oriented investors and value investment styles have long been the classic remedy to securities that have been oversold due to irrational markets or other investors. Recognizing a long squeeze scenario, value and deep-value investors are generally quick to react to stocks that may be trading at discounts to their true intrinsic values.
When a long squeeze situation arises, it's generally concentrated in stocks that have a limited float or market capitalization. These small or even micro-cap securities do not enjoy a healthy level of liquidity that can support price levels from irregular trading volumes. A quick trader, or more likely today, an automated trading system, can jump on an opportunity to exploit a long squeeze before others rush into the market bringing equilibrium back to normal levels. A stock's float is measured by its number of shares actually available for trading (some securities are held in treasury, etc.). Stocks with limited float make for natural squeezes, be it from the long or short side.