A few themes and names out there on watch, but nothing I’m too excited about. I’ll dive into DWTX long potential today instead since people liked the liquidity trap breakdown I did yesterday. 

DWTX was the 1000% mover today, and while it may not have made sense for you to trade it at all, there are some lessons in there and repeatable patterns – but these can be high risk as a long trade (and way higher risk as a short trade) so for most it may just make more sense to let these be. 

When we get parabolic 1000% moves like these there are usually several components. Remember, for something like this to happen there needs to be a significant supply / demand imbalance. So let’s explore how that happens. 

Typically in these situations, a low float stock gets moving and becomes the flavor of the day. Sometimes these trade very thinly so it doesn’t take a lot to move it up significantly. And then the volume starts to go nuts.

This is partly from longs who are chasing and partly from shorts who think this crap stock is up too much and will likely fade soon. The people who tend to get in the most trouble with these on the short side are the systematic short traders – “the stock is up xxx% so the system says there is a low probability it goes much further and it should have a lot of downside” thinking. So plenty of shorts in there thinking a big trade is coming soon.

Then the stock starts to have have these symmetrical start steps (you can see by looking at the middle/left of the chart where it ramped to 8 and then based at 5 and then ramped to 10ish and then based at 8 (not using exact levels here just the chart on this screen).

At this point the volume is going nuts and you get what we call high float rotation – where the volume traded is many multiples of the float available. That can get to a point where there is a false sense of liquidity. You may have 1 mil float but 60 mil volume traded on the day. So what happens if shares get locked up by traders and that 1 mil float becomes 200-300k shares that are being traded back and forth, with about 1 mil volume being traded per minute?

Thats when you can get a “break” in the system. You have lots of demand, super thin float, and lots of shorts in there saying “it’s up too much, it has to end soon”. The stock starts to rise and longs stop selling because it’s working for them and shorts then need to start covering because it continues to rise. That results in a massive supply/demand imbalance because now there are hundreds of thousands of shares that need to cover and longs are holding, so what happens next? 

The stock halts up, and then panic sets in on the short side. Now on the reopen, shorts scramble to cover, and new shorts come in thinking “that was the top” and it looks like the stock will fade but it holds some support area and then ramps again – and the cycle continues. The higher it goes, the thinner it gets, the more attractive it looks to new shorts, and the cycle goes on. 

That 8 consecutive green five-minute bar ramp up you see in the middle of the chart is that process playing out. It looks unnatural because it’s a supply / demand imbalance with tension in it all the way up.

So it’s not a random illogical thing that something goes up 1000%, its just the result of several factors coming together that create a supply/demand imbalance.