Parabolic Curves and Arcs - What Goes Up Must Come Down?
A parabolic curve or arc is one of the strongest and one of the most explosive of all uptrend chart patterns. This type of technical pattern is rare and is often driven by panic buying and subsequently by panic selling. The parabolic curve takes its name from a geometric shape commonly referred to as a parabola.
The psychology behind the pattern is associated with irrational buying and intense speculation. As the stock breaks out and accelerates to new highs, market participants become increasingly bullish often ignoring price and risk/reward factors. This strong price pattern can result in incredibly high returns in a very short period.
Many times you will see stocks appreciating in this manner near the beginning of a major rally or toward the end of a major bull run. Short-to-medium term trading ranges or technical bases often leads to technical breakouts and new record highs. The technical basing patterns often repeat multiple times as the stock or market in question trades to even higher and unsustainable levels.
These patterns generally occur with high growth and momentum-based stocks. These stocks are market leaders with new products, new technology, new business models, or new paradigms.
The price action pattern takes on a parabolic trend that looks like a staircase. The pattern can last for weeks but sometimes for months or quarters depending on the overall market condition. The danger occurs near the end of the formation after sustaining a straight-up move that places the situation at extremely overbought levels. The higher the frequencies of technical base breakouts before the extreme condition, the higher the probability for a quicker and steeper the price plunge when the trend reverses direction.
Parabolic Curves and Arcs are reversal patterns, and, as such, they have predictable outcomes. Although these patterns are predictable, they are relatively difficult to know when to enter the trade since the market sentiments are often excessively bullish, and the risk/reward profiles are unattractive. It is also fairly difficult to exit the position because of the speed and sharpness when it begins to decline.
Toward the end-stage panic buying and blow-off tops often occurs. Since most of the climatic buying comes from momentum and new traders when reality finally sets in this quickly turns into panic selling. Most Parabolic moves result in significant corrections. It remains debatable as to the extent of the downturn.
However, under normal market circumstances, corrections tend to find technical supports along with key moving averages (50-day, 10-week, 200-day, 30-week, etc.), major uptrends, prior crucial technical breakouts, and pivotal retracements (38.2%, 50%, and 61.8%). Under an unusual market scenario (i.e., global economic recession, financial/credit crisis, etc.) the corrections can lead to bear market declines sometimes resulting in declines as high as 60%-80% of the entire prior price rally.
What goes up must come down?
Attached are some of the most widely followed Technology and momentum-based names including TSLA, AAPL, AMZN, FB, GOOGL, NFLX, and MSFT. Although not all of these stocks are showing Parabolic Curves and Arcs they have, however, have appreciated greatly in the past year or so.
So, they do merit attention if and when they finally violate their respective Parabolic uptrends. Also, enclosed are key technical supports. It is important to remember that when these stocks fall toward converging major moving averages, key trendlines, and pivotal retracements they can take on greater significance, at least from a technical perspective.