Beware Of Parabolic Moves

At this time, there are many parabolic charts in the market. A parabolic chart is when an equity basically goes straight up in a 70 to 80 degree angle on the chart. It seems that the stocks and sectors that are straight up in parabolic fashion are increasing at this time. This is wonderful if you are holding the equity to the long side when it is rising, but remember, what goes up must come down. Often parabolic charts will fall just as fast as they increased when the buying spree ends. It is always difficult to know when a parabolic chart will meet its fate and stop climbing higher. Unfortunately, nothing goes straight to the moon, a dramatic decline will eventually follow.

Traders can just take a look at the recent run in Gamestop Corp (GME) to see how this pattern plays out. Now please understand, I’m using Gamestop (GME) as an example because it has already played out and it is a good chart to show you the ultimate outcome. As you know, Gamestop (GME) was trading at $19.95 on January 12th, 2021. They stock then soared to $483.00 a share on January 28th, 2021. This was as parabolic as I have ever seen, but like all parabolic charts it reversed and is currently trading at $46.85 a share. This is what will likely happen in so many stocks and ETFs that are currently trading parabolic right now.

In bull markets, these things can last a while, but they all end the same way. I’ve been through many bull and bear markets at this stage of my life. When the euphoria phase of the bull market ignites it is very powerful, but it always sucks in the weak hands at the top before reversing directions. The timing of the parabolic peak of an equity is very tough for most people as the excitement and greed get people into a buying frenzy. It’s like sharks in a sea of blood filled water, logic disappears and the feast of potential profit takes hold. All I will say, beware of parabolic moves.

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