What is a Long Squeeze?

A long squeeze, which involves a single stock or other asset, 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.

Key Takeaways

  • A long squeeze occurs when selling incites further selling, fueling a cycle and a large price drop.
  • Long squeezes are more common in assets that have seen a dramatic price rise with very high volume occurring when the price turns lower, and in low liquidity or low float stocks.
  • Value investors and trader who look for oversold conditions will watch for and step in to buy long squeeze stocks. If the stock doesn't find support or buyers, then the selloff was justified.

Understanding the Long Squeeze

Short sellers can monopolize the trading in a stock for a brief period of time, creating a sudden drop in price. Yet a long squeeze requires enough panic to set in that long holders start to dump their positions as well. A long squeeze, which has no fundamental basis for the selling, may last for some time, or it may be very brief. Value-buyers or short-term traders who watch for "oversold" conditions will step in once the price falls to a point deemed "too low," and bid the shares back up.

Long squeezes can occur in any market, but may appear more dramatic in low liquidity markets. While liquidity plays a role, so do technicals and supply and demand. A stock that has been running aggressively higher becomes more and more susceptible to a long squeeze, especially if volume is very high when the price turns lower. All those people who bought near the top will start exiting in droves if the price declines significantly. Many simply can't afford to hang onto the loss even if they think the price will get back to current levels, or higher, after the decline.

Value-oriented investors and value investment styles have long been the classic remedy to securities that have been oversold. 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. If a stock doesn't recover from its decline, then there was a likely a fundamental reason for the sell-off or the stock was overpriced to begin with. In this case, the selling was reasonable and justified and is not typically considered a long squeeze.

When long squeeze situations arise, they are generally concentrated in stocks that have a limited float or market capitalization, or at least the selloffs in these types of stock can be quite dramatic. These small or even micro-cap securities do not always 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 bring the stock back from its oversold state.

A stock's float is measured by its number of shares actually available for trading, as some securities are held in treasury or by insiders. Stocks with limited float make for natural squeezes, be it from the long or short side. In these types of stocks, fewer participants control the shares and thus the share price. A large sell order from a big trader can cause a cascade of selling. Compare that to a highly liquid stock with millions of shareholders, and millions more that are actively interested in buying the stock, and any long squeezes that do occur tend to be less severe.

Example of a Long Squeeze

Intraday charts frequently show long squeezes. This is because during most days there is no new fundamental news about the company, and on many days there is not even news about the economy. Therefore, when there is no major news out that could affect the fundamental value of a stock, the price will still fluctuate as people buy and sell.

Day traders need to get into an out of a stock within the day. Therefore, if the price is rising, and they enter long, they will sell if the price starts to fall by too much. Their timeframe is too small to hold onto a falling stock.

Consider this 1-minute intraday chart of Apple Inc. (AAPL). The price is always moving, and with no fundamental data to cause the selloffs, the selloffs that do occur are caused by short-term longs being forced to sell as the price starts to fall.

Intraday Long Squeezes as Longs Forced Out By Escalating Selling
Intraday Long Squeezes as Longs Forced Out By Escalating Selling. TradingView

The long squeezes were quickly met with buying, showing that it was panicked long holders taking profits and cutting losses who caused the declines, and not a fundamental shift in the value of the company.