What is a Short Squeeze? Understanding the Market Mechanics and Examples like GameStop's Ongoing Squeeze

A short squeeze is a market phenomenon that occurs when a heavily shorted stock experiences a sudden increase in price, leading to a rush of short sellers trying to cover their positions. This can cause a cascading effect, as the increased buying pressure drives the stock price even higher and leads to more short sellers covering their positions.

The mechanics of a short squeeze are driven by the market forces of supply and demand. When a stock is heavily shorted, it means that there is a large number of traders betting against the stock, expecting its price to fall. However, if the stock's price begins to rise unexpectedly, this can create a buying frenzy as short sellers rush to cover their positions and avoid further losses. The increased buying pressure can drive the stock's price even higher, causing a short squeeze.

An example of a short squeeze that has not yet finished is GameStop, which experienced a massive short squeeze earlier this year as retail investors coordinated on Reddit to push the stock's price higher. Despite the initial surge in price, GameStop's short interest remains high, and the on balance volume has not decreased relative to the stock's price. This suggests that the short squeeze may not yet be finished and that further price increases could be possible.

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