The chart below is kind of silly. It’s showing the current position of short traders on Bitfinex. It’s massive. It’s stupidly massive. It’s near its all-time high.

Now, this is a very interesting chart. When Bitcoin dropped below the 6300 value area yesterday, the short traders poured in. The motto of ‘buy the high, short the low’ is certainly the fastest way to the poor house in trading. But that is exactly what happened last night. And the volume of those shorts just grew massively. However, there’s something wrong with the chart above and the chart below:

The problem between the two charts is that Bitcoin has actually risen while the shorts have increased. There are a few ways to view this:

  1. There is a possible delay in the price action between the net short positions and the current price action.
  2. The short traders are holding their positions.
  3. The volume of the aggregate Bitcoin market is high enough to warrant a rise in short positions but is failing to show an actual move on the spot market of Bitcoin.

The most probable and realistic scenario is number 2: Short are holding their positions. This is an interesting thing to watch play out here because Bitcoin has not only recovered the ground lost last night but its very nearly back inside its triangle. In fact, this bull flag may be approaching a breakout zone even tonight. So what does that mean? It means one thing. One awesome thing: short squeeze. It seems very clear to me that the volume last night has all the appearances of a bear trap. If I was to short Bitcoin at the 6300 value area (which I did last night and promptly covered at a small loss) and hold it, I might be ok with the current value area at 6400. That’s well within normal price trading ranges. However, there’s something nasty ahead for those who are short. If Bitcoin does indeed breakout higher to the 6500 level, we’ll have crossed above the triangle. Not just that, but we’ll have traded and closed above the bull flag. This would show another leg and move higher. That first chart above would then see a huge red candlestick because shorts would have to cover. This begins the process of a short rally caused by a short squeeze: it’s like an oil fire in a kitchen – dangerous, fast and violent. You then have those short traders also converting into being long themselves after seeing the failed move lower.

Is there a case for lower prices? Sure. At the time of writing (1551 CST), the 4-hour chart shows 3 consecutive candlesticks failing to close above the lower triangles trendline. And silly things happen with price action in Bitcoin around 1500 and 2100 CST – it’s very easy for one well-to-do trader or one fund to very easily move this market due to low volume participation. All in all, I am very bullish on the present condition in the short term and I am looking forward to watching that Bitfinex short feed this evening.