Type Classifications

Use the Erlanger Type Classifications to Buy, Hold, Sell, and Sell Short Stocks!

Just what are the Erlanger Type Classifications? They are extra rankings designed to pinpoint four patterns:

Type 1: Short Squeezes.  We like to buy these. These are stocks whose relative strength is so strong that their Erlanger Technical Rank is above 70. This is not all, however. In addition to relative strength, in order to qualify as a short squeeze, there must be a lot of short selling. So a Type 1 short squeeze must have an Erlanger Short Rank above 50. The following chart shows CPN with its Technical and Short Ranks, its Short Interest Ratio, and a color study showing GREEN when the numbers indicated a Type 1 "Short Squeeze" was underway:

Type 2: Recognized Strength.  We like to hold these. These are stocks whose relative strength is strong but the short selling is light. In other words, the trend of strength is recognized and most expect it to continue, so the prevailing sentiment is to not sell short. While we hold these issues, we also view them as higher risk precisely because the strength is recognized -- the buying has largely already taken place. Moreover, Type 2s often turn into Type 4s at some point, so a strategy of getting ready to sell is appropriate, waiting for signs of relative weakness to trigger the sell. A Type 2 pattern of recognized strength must have an Erlanger Short Rank below 30. The following chart shows INTC with it's Technical and Short Ranks, it's Short Interest Ratio, and a color study showing BLUE when the numbers indicated a Type 2 "Recognized Strength" pattern:

Type 3: Shorts Are Right.  We like to avoid these. These are stocks whose relative strength is weak but the short selling is heavy. In other words, the trend of weakness is recognized and most expect declining prices to continue, so the shorts are correct. While we avoid these issues, we also view them as a potential precursor to a turnaround -- the selling has largely already taken place. Type 3s often turn into Type 1s at some point, so a strategy of observance is appropriate, waiting for signs of relative strength to trigger a buy. However, if a stock goes from a Type 3 to a Type 4, it is in real trouble -- this means the stock was unable to rise even after the shorts covered (closed out their short positions by buying back the shares they sold short). In other words, the shorts took their profits -- usually too soon. A Type 3 pattern must have an Erlanger Short Rank above 50. The following chart shows AMZN with it's Technical and Short Ranks, it's Short Interest Ratio, and a color study showing YELLOW when the numbers indicated a Type 3 "Shorts Are Right" pattern:

Type 4: Long Squeezes.  We like to sell short these. These are stocks whose relative strength is so weak that their Erlanger Technical Rank is below 30. This is not all, however. In addition to a lack of relative strength, in order to qualify as a long squeeze, there must be very little short selling. We interpret this as a sign of extremely bullish expectations. So a Type 4 long squeeze must have an Erlanger Short Rank below 30. The following chart shows MSFT with its Technical and Short Ranks, its Short Interest Ratio, and a color study showing RED when the numbers indicated a Type 4 "Long Squeeze" was underway: