The Short Interest Ratio and Technical Analysis

By Stock Research Pro • March 31st, 2009

The short interest ratio or “short ratio” is a sentiment indicator primarily used by technical investors to represent how many days of average volume it would take for all short positions to be repurchased. The ratio is calculated as the total number of shares sold short (short interest) divided by average daily volume. As an indicator, the short interest ratio combines the market driving forces of sentiment and demand for the stock.

Short-Selling and the Short-Interest Ratio

Short selling is selling stock not owned by the seller. When you short-sell a stock, you borrow it from the broker’s inventory or from another customer of the firm. When people short a stock, it is typically because they are pessimistic about the future performance of that stock. If the stock price rises, they lose money as you have to buy the stock back at the higher price. Short selling is risky as it is essentially a bet against the overall direction of the market (over the long-term, stock prices tend to rise) and it involves the use of borrowed money. Stock exchanges will usually report the total number of shares of a stock that have been sold-short and not yet repurchased, this is known as short interest.

The Short-Interest Ratio and Technical Investing

The level of short interest reflects the bearish sentiment among short sellers. At some point, however, short-selling involves buying back the stock for delivery to the lender. For that reason, many investors interpret a high short ratio as an indicator that there will be demand for that stock that will put upward pressure on its price. Many technical investors consider a high short-interest ratio bullish- an indication of future demand for the stock by those who are holding it short.

To find the short ratio on a stock, go to Yahoo! Finance, enter the stock symbol in the Get Quotes window and click on the Key Statistics link. Look at the right column under Share Statistics.

The short interest ratio can also be applied more broadly to determine the sentiment of the market as a whole. Investors may become bullish as the short interest ratio for an exchange approaches 5.0 and bearish as it declines toward 3.0.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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