Short interest
Very few people put enough emphasis on short interest and its effect on your investments. Short interest is simply the amount of shares that are sold short for a particular corporation. Ford has a short interest of 209,000,000 shares, meaning that 209Million shares are held short right now.
Short interest is a great way to see what other investors think of your investment. A high short interest figure means that people think the business is going down the tubes, low short interest shows some positive thinking.
Short interest can also be applied to predict huge market movements. Sometimes short interest is shown in a ratio of the amount of shares held short divided by the average daily volume of the stock. This ratio shows how many days it would take for short sellers to cover their position, or buy back stock equal to the amount they sold short.
When the short interest ratio is a high number, it means that it would take several days for the short sellers to buy back stock. Contrarian investors generally believe that when a short interest ratio is a high number, that the next step is a reversal when short sellers start to cover on their positions. Common belief is that people will start buying to cover on their positions when the stock moves upward, creating explosive gains from net buyers and people covering their short positions.
When a stock hits rock bottom and then reverses, short sellers start to buy back stock to get out of their position. As they do this, it creates a large amount of buyers which throws off the balance and sends the stock price skyrocketing. Short interest is most important when resistance is broken and short sellers start to cover their positions.
Short interest ratios only work on small to medium volume stocks. For corporations like Intel with a large daily float, short sellers make up a small position meaning less impact on a breakout. For smaller companies with low volume, the buy-to-cover purchases will send the stock flying.