As you already know, technical analysis is the way we study the psychology of market participants. Tools for the analysis were given in the technical analysis block. Here, let’s break down participants into three categories: those who are positioned long, those who are positioned short, and those who are in cash looking for a long or short entry. We will go through several scenarios to outline the psychological states of market participants, so you have a frame of reference for how to think about them.
Gap below support
Take a look at how Fluor Corporation (Engineering & Construction, USA) found resistance at $51.50 in July and early October 2024:
After the stock broke that resistance in the middle of October, the resistance became support. The stock touched $52 several times, but the support held, and then it broke that little pullback downtrend and closed strong on higher-than-average volume. The next day, the stock gapped up over 6% to $58 and held the gap – and the next day too – but then they released an unpleasant earnings report on 08Nov2024:
“Co Reports Q3 (Sep) earnings of $0.51 per share, excluding non-recurring items, $0.25 worse than the FactSet Consensus of $0.76; revenues rose 3.3% year/year to $4.09 bln vs the $4.74 bln FactSet Consensus. Co issues in-line guidance for FY24, sees EPS of $2.55-2.75, excluding non-recurring items, vs. $2.88 FactSet Consensus. This is down from prior guidance of $2.50-3.00.Fluor Board of Directors approves an increase in share repurchase program to 30.5 million shares authorized for repurchase in support of management’s capital allocation program.“
The next day, the stock opened at $51.68. Let’s go through the participants’ psychological state.
Longs – all who bought on the $51.50 resistance breakout, supported the stock at $52, bought on the breakout from the pullback, and bought the gap – are out of the money. They are nervous, and the closer the stock is to their entry price (most of the buys were around the $52 support), the greater the temptation to end the pain by selling their positions (increasing supply). Some longs would love to add to their size, especially if the stock goes back above $52 and holds that support again (because that might be interpreted as a failed breakout of the support level – a bullish setup). Some who were long from $44–$46 were rewarded with a 25–30% move and took profits. They might look to buy more closer to $50, $48, or $46.
Shorts – the short float is not very big, but there are 6M shares sold short, so they could create some supply by covering their profits, especially near the $50, $48, $46, and $44 levels (creating demand). Some of them would like to add to their size on a $52 retest (adding supply).
Cash – some would like to short closer to $52, taking advantage of trapped buyers (creating demand) and bad earnings report. Others would like to buy the stock at better prices – $50, $48, $46, and $44 (creating supply).
Take a look at the intraday picture:
The stock slipped down to $50 right before the open, rejected it, and at the open went up to $52, penetrated the level by 30 cents, and then failed miserably to $49. Then it went up to $52, only to be rejected once again.
Big Short Interest
1) QBTS Gap, Give and Go Short Squeeze Trade.
Take a look at D-Wave Systems (Computer Systems, USA). D-Wave claims to be the world’s first company to sell computers that exploit quantum effects in their operation. D-Wave’s early customers include Lockheed Martin, the University of Southern California, Google/NASA, and Los Alamos National Laboratory. The whole quantum sector is pretty hot in 2025. This company had 17% short interest. That means 17% of its outstanding shares are used to establish short positions – a pretty big number. This stock costs $7, which means the maximum theoretical reward is $7 right now, but the risk is unlimited (the stock may open at $10, $20, $50, etc. the next day).
Imagine the stock gaps up above that $8 resistance and can hold that level. Let’s think about the psychology of market participants.
Longs – all who bought since April are in the money. Some of them may start taking partial profits (increasing supply), while others may look to add to their winning position closer to the $8 potential support (adding demand there).
Shorts – they would be nervous due to unlimited risk, which may cause them to cover (making them natural buyers and increasing demand). Since the short float is large, that may provoke a short squeeze. Often during a short squeeze, the stock moves very high, very quickly, because many of these shorts maintain a short bias and, after covering, they re-short at higher levels – only to be stopped out again.
Cash – some would buy the breakout near $8 (increasing demand), and others might short the stock closer to potential resistance at $12 (increasing supply).
That’s exactly what happened the next day. The company beat both EPS and revenue, opened with a gap, and closed up 50%.
Take a look at the intraday chart:
Note how QBTS opened at $8.70 and dropped to $7.70 before demand started to exceed supply.
B) HTZ 3:30 Short Squeeze Trade.
Let’s take a look at an example of how the time of day affects the psychology of market participants. Look at Hertz Global Holdings (Rental & Leasing Services, USA), which sold off from $20 to $2.50 in a year:
And we see the $3.20–$4.50 range the stock established on the daily chart:
HTZ had a short float of 40%, and all of a sudden, the company opened at the high end of this range and held its gains on huge relative volume:
That day, news hit that Pershing Square Capital bought 12M shares (4.1%), bringing their position to around 20%. You might think that since the hedge fund already bought the shares, it shouldn’t create additional demand – so the stock should not move. But let’s break down the psychology of market participants.
Longs – they might be very pleased to hear this information because Pershing Square is a highly successful hedge fund. That instills confidence—knowing this fund is also positioned the same way. So, many longs might hold their shares until new highs (not increasing supply at the moment), and some might be willing to add to their position (increasing demand), especially if the stock breaks out of that range on the daily chart.
Shorts – they would be nervous due to unlimited risk – a successful hedge fund taking a big position could make them start to cover (becoming natural buyers and increasing demand). Since the short float is so large, this could trigger a short squeeze.
Cash – some would look to buy the range breakout (increasing demand), while others might short the stock closer to potential resistance levels we saw on the weekly chart (increasing supply).
The relative volume ratio was around 9, but demand couldn’t exceed supply, and the stock kept trading between $4 and $4.50—at the top of the daily range. Right before the close, CNBC aired the news, saying: “New on Closing Bell, exclusively today – Bill Ackman reported a stake, making him the second-largest shareholder…”. Now think about how the shorts must have felt – it’s the end of the day, just 20 minutes before the bell, the stock is being promoted on CNBC – it could easily open at ~$10–$20 the next day, while the maximum theoretical reward is now around $4. So they became very nervous and started to get the hell out. They simply piled in because they knew there wouldn’t be enough liquidity for all of them, since after-hours trading is usually much less liquid.
That’s why it’s called the 3:30 Trade – when there isn’t much time before the close, it forces you to take action. Here HTZ gained 100% in about two hours.
By the way, remember earlier when we said that many of these shorts preserve a short bias and, after they cover, they re-short at higher levels – only to be stopped out again? Well, within three weeks, HTZ’s short float increased to 45%:
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