A short squeeze occurs when a stock's price increases, forcing those who have taken short positions in the stock to close out their positions. They must close out their positions by buying shares, which puts further upward pricing pressure on the market price of the stock. This is a major risk for short sellers, who may incur substantial losses if they continue to hold their short positions. Few short sellers have sufficient cash reserves to maintain their short positions when a prolonged short squeeze occurs, so a significant squeeze will likely eliminate many of these holdings.
The upward pressure on the price of stock typically occurs when the issuer reveals positive information, implying that the value of the firm has increased.