Oh sure… it’s all fun and games when prices are going straight up.
But, as the old saying goes… “What goes up must come down.” And, the more straight up it goes, the faster it drops.
That’s the problem with parabolic moves. They almost always end badly.
And when they end, they wipe out a lot of the money of the folks who chased prices higher.
Of course, it doesn’t have to be that way…
The end of a parabolic move can actually be quite profitable for traders who can recognize the move is ending and are gutsy enough to attempt a short trade.
For example, think about the setup in natural gas in September 2021.
The United States Natural Gas Fund (UNG) – which tracks the price of natural gas – had risen 80% in three months. The chart had gone parabolic.
Just take a look at the chart below…
We noted at the time that UNG was setting up for “one heck of a reversal trade” for anyone with the guts to make it.
We also noted that it probably seemed crazy to even think about shorting natural gas into this sort of a move. But, that’s usually the best time to make that sort of a trade.
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Because when parabolic moves unwind, the decline often wipes out the entire move.
And that’s exactly what happened with UNG.
Take a look at the chart below…
Traders who had the guts to short UNG into its parabolic move in September were looking at nice profits less than three months later.
Need another example?
Let’s look at one of the best examples of a parabolic move ever – bitcoin back in late 2017…
The black line on the chart shows the parabolic move. The rally started in mid-September 2017. Then, it gained momentum until the chart went straight up – parabolic – in mid-December.
Then, bitcoin started to fall. And it kept falling throughout all of 2018 until the entire gain from the parabolic move was wiped out.
Here’s another example of a parabolic move in one of Wall Street’s favorite stocks – Tesla (TSLA)…
The parabolic move in TSLA started in November 2019 and peaked the following February.
From there, TSLA fell sharply. By mid-March 2020, TSLA was nearly all the way back down to where it was trading at when the parabolic move started.
Of course, the bursting of a parabolic move doesn’t crush the price of an asset forever. Tesla and bitcoin eventually recovered and went on to see huge gains.
So, we’re not talking about holding a short trade as a long-term position.
Rather, the point of shorting a parabolic move is to take advantage of the decline that usually follows such a move. Once the stock has fallen back close to where the previous rally started, that’s when it’s time to cover the short position and take your profits.
As I said earlier, it takes guts to short a stock that’s in a parabolic move.
But if you can get the timing right, then this pattern can produce big profits from the short side.
Best regards and good trading,
Have you ever profited from shorting a parabolic stock?
Let us know your thoughts – and any questions you have – at [email protected].