Float Analysis and Identifying a Short Condition

Float Analysis – Understanding the “health” of the publicly traded share supply in relationship to the demand is very beneficial in both terms of volatility (rate of change) and size. If the float of a company is very small and sees an upsurge in volume, it is prone to extreme volatility given an almost certain supply and demand imbalance. This has extremely attractive points for traders as well as not so attractive ones.

1. Float

What Does Float Mean?
The total number of shares publicly owned and available for trading. The float is calculated by subtracting restricted shares from outstanding shares.

Investopedia explains Float
For example, a company may have 10 million outstanding shares, but only seven million are trading on the stock market. Therefore, this company's float would be seven million.

Stocks with small floats of less than seven million shares tend to be a lot more volatile than others.

So float size is an important dynamic that some traders seek out purposefully to exploit the volatility. Another dynamic is the number of shares traded in relationship to the size of the float.

2. Thinly Traded

What Does Thinly Traded Mean?
An asset that cannot easily be sold or exchanged for cash without a substantial change in price. Thinly-traded securities in the financial markets are exchanged in low volumes and often have a limited number of interested buyers and sellers, which can often lead to volatile changes in price when a transaction does occur.

Also known as illiquid.

Investopedia explains Thinly Traded
The stock prices of small unknown publically traded companies are deemed to be thinly traded. The lack of ready buyers and sellers generally leads to large discrepancies between the asking price and the bidding price. Thinly-traded securities are usually more risky than liquid assets because a small number of market participants can have such a large impact on the price.

Float Turnover (TOR) = the average volume over X periods divided by the Reported Float.

The working theory is that a perfectly balanced float will typically run through a "cycle" in 3 months. Given that, a healthy Float (balance) is achieved when the daily session trades around 1% or monthly approximately 30% (21 trading days).

Thinly Traded Stocks: (daily % < 1 of the Reported Float) are prone to increased volatility because of the supply/demand imbalance.

On the one side a quick price spike can be achieved when volume suddenly surges as demand sees a rapid (perhaps even unexpected) increase.

On the other side however is volume sustainment-- if the volume wanes the supply/demand relationship imbalance "flips," the price is susceptible to a precipitous decline and may become more difficult to sell depending on the number of shares owned.

Float Runner Setup: This setup attempts to find stocks that have an increased supply/demand relationship that signals a higher probability for a sharper increase in a stock's share price over a shorter period of time.
Can be used in conjunction with the Standard or Pincher Setup
Additional setup that attempts to take advantage of a significant Short Ratio against a fundamental counter-propellant

Recognizing changes in Short Positions

Amex Short Interest

Nasdaq Short Interest

NYSE Short interest (via Nasdaq)

Change in Money Flow indicators (CMF & MFI short period over/under long), shift in money momentum (ChiOsc) and volume wane and reversal (PVO)

Example 1: