Parabolic moves always end badly.
Oh sure. The move feels great as the asset seems to gain in value every day. But, straight up moves are unsustainable. They eventually burn out.
And once that happens, the move lower usually wipes out every bit of the gains.
Think about the action in Bitcoin, or any other cryptocurrency for that matter, towards the end of last year. One Bitcoin was worth $6,500 in mid-November. It was trading near $20,000 just one month later.
The action in Bitcoin was straight up. Buyers rushed in every day. Overbought conditions got more overbought. And the price went parabolic.
But, like I said earlier… parabolic moves always end badly. The price of Bitcoin peaked in mid-December. By early February, just six weeks later, Bitcoin had fallen all the way back down to $6,500. It gave up all of the gains from the parabolic move.
Now, think about the action in the S&P 500 from last November to late-January. It was the same sort of parabolic move.
Despite overbought conditions, investors kept chasing stocks higher. The S&P 500 was at 2575 just before Thanksgiving. It peaked near 2880 a couple of months later. And most of that gain occurred in the final two weeks – when stocks seemed to rally every single day.
I remember that situation well.
I was under-invested. I argued that conditions were overbought and investors would likely have a better opportunity to buy in the weeks ahead. I reminded traders that parabolic moves always end badly. And I cautioned folks to remain on the sidelines and not chase stocks into overbought conditions.
It took only two weeks for the market to wipe out all of the gains. By Valentine’s Day, the S&P 500 was back down to where it was on Thanksgiving.
Here’s the chart of the parabolic pattern on the S&P 500 that I first showed you back on January 29…
You can see the parabolic move higher and the subsequent sharp decline.
For today, I’d like you to keep this chart in mind as we consider another aspect of parabolic moves… They don’t always occur to the upside. Indeed, parabolic moves happen to the downside as well.
And that’s exactly what we’re seeing right now in the gold sector.
Take a look…
Gold stocks – as represented by the VanEck Vectors Gold Miners ETF (GDX) – have been on an uninterrupted move lower for the past six weeks. Despite horrendously oversold conditions, the sector has not been able to bounce. The decline has accelerated over the past few sessions. And, as you can see from the chart, it has clearly gone parabolic to the downside.
Just as a parabolic upside move is unsustainable, so too is a parabolic downside move. These sorts of moves don’t last, and they tend to quickly recover the lost ground.
Granted… I’ve been bullish on gold stocks for the past six weeks. Clearly, that was the wrong posture. And you could look at the current situation and argue that I’m just trying to find some way to justify maintaining a bullish stance.
That’s fair enough.
But I was cautious on the broad stock market back in mid-January – and I took plenty of heat from readers as stocks marched higher. The technical setup kept me cautious and kept me looking for lower prices at which to put money to work. That proved to be the right posture when stocks corrected in February.
Today, the technical setup in the gold sector has me looking for reasons to buy. Personally, I already have a fair amount of gold stock exposure – which is largely underwater at this point. I added more to my gold stock positions yesterday. And I’m willing to add even more on a further decline.
This current downside parabolic move is likely to end with a sudden burst higher and a reversal of the entire decline from early July.
Call me crazy… but, I want to own the gold stocks in anticipation of that move.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Today, a continued outpouring of kind words for Jeff, Benito, and the Delta Report…
Jeff’s commentary is great – keep up the great work. Your intuition is fantastic. Impossible to be perfect, but logic is sound.
– Marty
What a great gift for your father-in-law, your kids, and YOU. Markets shmarkets. There is still a real world beyond the internet – keep exposing your kids to it.
– Robert
Jeff, if you haven’t already I suggest reading Your Money or Your Life. Your essay captures the spirit of that book. That the only real asset we have is our time, the limited hours of our lives. Money is simply something we sell our time for. And spending life time with family in a small Italian village sounds priceless to me. Good for you for spending your TIME wisely.
– David
Just a note to express my thanks for sharing your father-in-law’s experience returning to his home village. You watching the scene unfold is a wonder that will stay with both of you for life. It would have been so easy in this “connected” life we live to think it unworthy of your time to return to an obscure village that your father-in-law fled 70 years ago. I’m certain that you and he will share the memories of the trip forever. I’m very appreciative that you shared it with your readers!
– Don
I love my Delta Report subscription and wouldn’t trade it for anything. Happy with most recent trade on SPY.
– Sandra
Thank you, as always, for your kind and thoughtful feedback. Keep it coming – along with any trading questions or comments – right here.