How to identify short covering?

Hello
Often I hear the phrase "Short covering Rally"
To my knowledge if traders go short then the prices of the scrips rises temporarily a day/two and later the price will come down mostly.
How to identify and conclude short covering in a perticular stock?
How is it useful for positon traders?
Plz give me the resp links.
Thank you
srinivas

Hello srinivas,

In the morning people SHORT the market with anticipation that
the Market will crash.If this do not happen ,they try to BOOK
profit in whatever level they could ( to make healthy profit depending
on the level they entered in the morning).This will create ARTIFICIAL
liquidity and market moves up.This will create a PANICKY situation
and more shorters sell there positions.This will lead to short covering
rally.

Thank you sir for giving reply.
But how to identify short covering statistically?
Which data i need to look out for?

23.3.9

To continue with the same query ... How to differentiate between Fresh buying and Short covering? How to know what the Volume data is representing -- Fresh buying or short covering ?

Thanks

mnandini28

Though not as simple as replying in a post, try to watch specific scrips (this is what I do), where you could expect value buying, again be clear about "value buying", which scrips are not suitable for speculation...

Yes, I know I am not to the point, still I make sense, hope this helps

you may have come across in the financial papers, statistics of Open Interest. I have saved the following conditions for my intrepretations

1) Price up & OI up-long built up
(2) price down & OI down- long liquidation
(3) price up & OI down- short covering
(4) price down & OI up- short built up

Hope this helps you to identify short covereing or long build up. You can track this for specific scrips by using the NSE web site.

Srichakra

Your question is more towards deconding the market internals i.e. what is going on behind the scene shown on price chart.

IMO, the answer lies in monitoring the Open Interest number wrt to its previous value.
OI goes up when new contract is sold / bought..and the position is opened fresh.
As participants, close there position (cover their position), OI falls.

So if you see OI increasing with price going up, then it is new bullish positions are building up
when u see OI decreasing, and price going up, it is due to short covering of previously opened positions.

For more details/, example of this - please search other threads on Open Interest topic (I remember giving example of this in some thread, but can't pull out the link now)

As per my understanding, this info can't be seen on regular charts so easily. Because each trade adds to the daily volumn so every buy+sell trade will increase the number
whereas in OI calculation, the number is increased only when there is new contract position created else there is no change.
And any upmove in Price is upmove and it is reflected with ascending graph.

Happy trading.

I think cost of carry is the best indicator for short covering

1. whenever there are open short positions, cost of carry is negative and with every short position added, moves further into negative.

Similarly, when there is short covering, cost of carry moves towards zero.

Sorry for inaccurate explanation. Unable to put it in words

That's great!

We are coming out of every possible explanations I am afraid the thread initiator would get confused:lol:

THANK YOU VERY MUCH FOR YOUR CONCERN ON ME :clapping:
But in the discussion , what is cost of carry indicator?