Sunrun Inc. (NASDAQ:RUN) continues to head lower Monday. This follows Friday's loss of more than 4.5% after recent gains. There is a good chance the move lower will continue.
A recent move higher was probably due to a short squeeze. Stocks can drop significantly when a short squeeze ends. This is why our trading team has made Sunrun our Stock of the Day.
People who sell short anticipate a decline in the price of a stock.
They borrow shares from someone else and sell them. They hope that after the stock declines, they will buy the shares back and return them. Their profit will be the price they sold short for minus the price they bought the shares back at.
If a stock rises above the price the short seller sold the shares for, they start to lose money. And if the price keeps rising, their losses grow. Sometimes, some of the short sellers start to panic as the stock continues to rally.
They enter the market as buyers and this forces the price even higher.
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If the price gets high enough, some of the people who loaned their shares to the short sellers will decide they want to sell them. This forces the short seller to buy the shares back regardless of the price, so they can return them.
At this point, the stock can go parabolic. As you can see on the chart, this is what happened with Sunrun last week.
When a short squeeze ends and the panic is over, the stock typically makes a rapid and large move lower. They can even drop back to the levels they were trading at when the squeeze started.
It isn't a coincidence that Sunrun reversed off the $13.35 level. This level had been support and prices that were support can turn into resistance.
Some who bought shares in October saw an opportunity to finally exit their positions at breakeven when the stock returned to this price last week. The large amounts of sell orders placed by these remorseful buyers created resistance at the price that was support.
As this short squeeze unwinds, there is a good chance the stock continues to head lower.
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