This Pattern Could Spell Trouble

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 straighter 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.

For example, one of the most dramatic parabolic moves of our lifetimes occurred in Bitcoin in late 2017 – when Bitcoin rallied from less than $4,000 to over $19,000 in about three months.

Here’s the chart of that move…

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 decline wiped out all of the gains from the parabolic move.

Need another example?

How about the action in AMC Entertainment (AMC) during the “meme” stock craze in 2021…

Shares of AMC ran from $5 all the way to $40 in a parabolic move during the spring of 2021. Eventually, the market erased the entire move.

Parabolic moves are not sustainable.

The gains are almost always given back. And, that should be a concern for anyone buying consumer discretionary stocks at the moment.

Take a look at this chart of the Consumer Discretionary Select Sector Fund (XLY) – an exchange-traded fund composed of companies producing non-essential but fun-to-have consumer goods…

XLY is making a parabolic move.

It’s not as extreme a move as the Bitcoin and AMC examples.

But we’re not dealing with a speculative asset or meme stock here. This is a diversified basket of consumer goods stocks like Home Depot, Amazon, Starbucks, McDonald’s, and Tesla.

It’s rare to see this type of action in an exchange-traded fund that is diversified among several industries. And, it’s a good indication that the current rally – in this group and in the broad stock market in general – has gone a little too far, too fast.

Once this parabolic move exhausts itself, consumer discretionary stocks will come back down.

They’ll likely give up most, if not all, of the gains for the past two months.

Traders should avoid the impulse to chase these stocks higher right here. We’ll likely have a better chance to buy them at lower prices a few months from now.

Best regards and good trading,

Jeff Clark

Are there any stocks on your watchlist that you’re waiting to buy during a pullback?

Let us know your thoughts – and any questions you have – at [email protected].