In simple terms
A squeeze occurs when price moves against a group of traders and pressures them to reduce or close their positions. Their exit trades go in the same direction as the initial move and may accelerate it for a limited time.
When short sellers mainly have to buy back, the event is a short squeeze. When leveraged bullish positions mainly have to sell, it is often called a long squeeze.
What to examine
The word describes a possible mechanism, not merely a large candle. Assessing it requires context about positioning, stock-loan cost and availability, margin, liquidations, volume, and the rules of the trading venue.
In another usage, “squeeze” may describe volatility compression before an expansion. To avoid ambiguity, specify short, long, or volatility squeeze.
Limit
Not every fast rally is a short squeeze, and not every fast decline is a long squeeze. Price and volume alone cannot identify who traded or whether position closing was voluntary or forced.
Sources
- Investor.gov, Short Sales — describes short selling, repurchasing shares, and the risk created by a rising price.
- FINRA, Know What Triggers a Margin Call — explains margin calls and sales that a brokerage firm may impose.
- CME Group, Futures and Options Margin Model — documents the role of margin in derivatives risk management.