V.7:2 (37-38): Short Interest by Arthur A. Merrill

Short Interest by Arthur A. Merrill

Short interest – the sale of borrowed stock – is one of the most useful tools of the technician. Short sales are made by pessimists, who expect prices to fall. If prices fall, the short seller can buy shares at a lower price and return the borrowed stock.

Because short sales are made by pessimists, it would seem that a high short interest, displaying a large number of bearish investors, would be a bearish indicator. No way! A high short interest means that past sales have been made, future purchases must be made. High short interest, therefore, represents high potential demand for stocks and has been found to be a bullish sign.

However, when you consider the ratio of short sales made by professionals to the short sales made by the "public," a high figure is bearish. When the professionals are pessimistic and the public is optimistic, beware!