Parabolic moves always end badly.
It doesn’t matter what the argument is for the move. When the price of an asset moves straight up, and is accompanied by a huge burst of bullish sentiment, the rally is not sustainable. It pretty much always ends with a downside reversal that erases the gains as quickly as they were achieved.
That was the case for silver back in 2011. The price of silver rallied from $34 an ounce in mid-March to $48 an ounce by mid-April. It was a straight-up move. And just about everyone was looking for higher prices.
By mid-May, silver was back down to $34 an ounce. It had given back all of its gains.
Gold did the same thing a few months later. The yellow metal was $1,600 an ounce in mid-July, 2011. It rallied straight up to $1,900 an ounce by mid-August. Gold traded down to $1,600 an ounce one month later – effectively erasing all of the summertime gains.
I remember that situation quite well.
You see, I told subscribers back in August of 2011 that I was kicking myself for missing the parabolic move in silver a few months earlier. I saw the action unfolding and I hesitated to pull the trigger on a short trade on silver. So we missed out on the potential gains as silver retraced its rally.
I didn’t want to make the same mistake with gold. So, I told subscribers to buy put options on the SPDR Gold Shares ETF (GLD) in anticipation of a reversal of the parabolic move.
You cannot imagine the response I got. Folks were furious that I would recommend a short trade on an asset that was in full-on rally mode. But that trade worked out quite well. If my memory serves, we closed the position for something like a 150% gain in just a few days – as gold tumbled from $1,900 an ounce all the way back down to $1,600.
Now, let’s think about the action in bitcoin – or any of the other cryptocurrencies – over the past month.
In early December, bitcoin was trading for about $10,000. The price then went parabolic. Bitcoin traded near $20,000 by mid-December.
Yesterday, just one month later, bitcoin was back down to $10,000. It has retraced the entire parabolic move.
That’s typical. Parabolic moves are not sustainable. They don’t hold up. And when the trend finally does reverse, it erases all of the gains from the move.
That’s my concern with the broad stock market right now. The S&P 500 is up 5% since the start of the year. It has been a one-way move higher. And it looks to me like a parabolic move.
Here’s the chart…
When this move finally does correct, and it will at some point, then the S&P has risk of a decline all the way back down to where it started the year at 2673. That lines up with the 50-day moving average line (in blue), and it’s a reasonable area to support the market.
That’s not a big move lower. We’re talking about erasing just the gains for the last three weeks or so. That shouldn’t cause too much damage for most investors.
But for folks who’ve been chasing this market higher in the face of overbought conditions, even a 5% decline from current levels will be painful.
Now, I can’t tell you when this current rally phase will end. I thought it would have run out of fuel by now.
But I do know a parabolic move when I see one. And the S&P 500 is in the midst of such a move.
These sorts of moves always end badly. And the resulting decline usually gives back all of the gains. So, I expect we’ll see the S&P 500 trade back down below 2700 or so in the coming weeks.
The Volatility Index (VIX) did not close back inside its upper Bollinger Band yesterday. So we don’t yet have a buy signal from that indicator. That leaves the door open for a larger spike higher in the VIX – which could result in a sharp spike lower in the broad stock market.
Most traders would do well to be a bit cautious right here. The next few days could be rough for the bulls.
Best regards and good trading,
Jeff Clark
Reader Mailbag
For today, more thoughts on gold…
Disregarding fickle investor greed and fear, gold just reflects the value of what it is priced in or measured against. Inflation = dollar devaluation = rise in gold price. But the average citizen cannot grasp that inflation steals worth from what he already paid taxes on and worked hard to save.
Apparently government can fool the average citizen all the time. Need more proof? Lobbyist campaign contributions are not recognized as what they really are – bribery, and money for favors.
– Bernard B.
And updates from our Delta Report portfolio…
You have mentioned TEVA being the turnaround stock of 2018. It’s up handsomely already. If it can break above $20, it looks like the next resistance would be in the high $20s.
– Charlie E.
I’ve been following your TEVA recommendation for months. You said, on several occasions, that TEVA might be the comeback story of the year. So, I purchased speculative call options in Nov, Dec, Jan, and Mar. Well, I had complete losses on the Nov and Dec series, but I just closed out the Jan and Mar options for a whopping 575% gain! More than covers my losses on this stock, plus your lifetime subscription price!
Thanks for letting us know when you feel VERY committed on the direction of a stock, it makes a big difference trading with your expert opinion so firmly behind my trades. Looking forward to hearing about your biggest comeback ideas for 2018.
– James E.
As always, feel free to send in your trading stories, questions, and suggestions right here.