Beware Of Parabolic Charts
Nicholas Santiago | Apr 11, 2013 11:28AM ET
Many traders and investors love to see and find a good breakout pattern on the charts. While such patterns are great, we've got to know when they become parabolic. That's because parabolic charts often signal the time to sell out of the trade.
Parabolic Defined
A parabolic chart is when a stock price rallies sharply higher in a very steep angle on the charts. Often, when a stock surges sharply higher without pulling back, it can only travel so far before the owner of that equity starts to sell out of the position.
Don't Chase Extended Equity
For example, the other day First Solar Inc. (BVSN ). This stock surged from $10 a share to $55 in just two months. That type of pattern is again unsustainable and the traders and investors that caught the move are going to sell out of the position at the highs. That stock plunged from a high of $55 a share back down to $10 in just three months.
Watch The Steep Angles
The same parabolic patterns repeat over and over throughout history on all time frames. Traders and investors must simply know that it is not prudent to chase an equity when the chart pattern moves up in a very steep angle. Knowing this pattern should help to keep a lot of novice traders and investors out of buying equities that have already made their momentum move.
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