Short Selling Bubble Stocks - Looking for weak holders

In the old pre-1929 days, the bears would find an overpriced stock and slam the bid hard, driving the stock down and causing the bulls to panic and sell out cheap.

In modern times, the bears would follow a stock up and when they felt it was vulnerable they would go gunning for the stops. The bulls would follow the trend up and put sell orders, stop loss orders, below the market to get out fast if the stock declined. Suspecting the presence of a large grouping of stop orders below the market, the bears would know the stock down through the price of the stop loss orders and then mop up cheap stock when that stock hit the market.

Many of the bulls used stock price charts and by drawing the same lines as the bulls, the bears knew where the bulls were likely to have their stops and went hunting accordingly.

In last few decades, one of the methods used was to find a bubble stock, usually a small cap manipulation, dig up and document the dirt using a private investigator, and give the dirt documents to financial columnists who released it while you blast the bid.

Then came the naked short sellers, shorting more than the outstanding stock and driving the company to oblivion.

Now we have blogs that release the results of their investigations.

Here is stock that just suffered from a negative research report, OMEX. See the drop from $3 down to almost $2.  The company has tried to invalidate all the alleged negatives, but so far without much result.

 Chart courtesy of Stockcharts.com

The bears, good predators as they are, look for signs of weakness.

If they see small public investors jumping in on an overpriced bubble, they know the stock can be driven down.

Recently, the Facebook IPO was done at a high price, the company put a ton of stock on the market at the last minute, and the small investor, aka "the public" was hot to get in on the deal.  Great opportunity for the shorts.

Chart courtesy of Stockcharts.com

When a stock drops that fast from the opening, it is hard to get anyone brave enough to fight the trend.

No doubt driving the stock down into the 20s caused a lot of small holders to sell.

That, is what the predatory shorts are looking for.  A large discrepancy between price and value, a bubble, caused  by small, timid public investors paying too much.

Institutional investors can be more brave, but they also can fear having a loser on their books when they have to report for the period and sell beforehand to avoid being embarrassed.

In fact, having a huge percentage of institutional investors in the stock in very often a sign of impending doom. if you see 85% of the stock owned by institutions, you have to suspect that they may be overdoing it and can be stampeded by bad news.

Look for weakness, but the basic pattern is to prey on the small investor who has been carried away with enthusiasm.