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<\/p>\nParabolic moves always end badly.<\/p>\n
It doesn\u2019t 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.<\/p>\n
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.<\/p>\n
By mid-May, silver was back down to $34 an ounce. It had given back all of its gains.<\/p>\n
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 \u2013 effectively erasing all of the summertime gains.<\/p>\n
I remember that situation quite well.<\/p>\n
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.<\/p>\n
I didn\u2019t 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.<\/p>\n
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 \u2013 as gold tumbled from $1,900 an ounce all the way back down to $1,600.<\/p>\n
Now, let\u2019s think about the action in bitcoin \u2013 or any of the other cryptocurrencies \u2013 over the past month.<\/p>\n
In early December, bitcoin was trading for about $10,000. The price then went parabolic. Bitcoin traded near $20,000 by mid-December.<\/p>\n
Yesterday, just one month later, bitcoin was back down to $10,000. It has retraced the entire parabolic move.<\/p>\n
That\u2019s typical. Parabolic moves are not sustainable. They don\u2019t hold up. And when the trend finally does reverse, it erases all of the gains from the move.<\/p>\n
That\u2019s 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.<\/p>\n
Here\u2019s the chart\u2026<\/p>\n
<\/p>\n
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<\/a> (in blue), and it\u2019s a reasonable area to support the market.<\/p>\n That\u2019s not a big move lower. We\u2019re talking about erasing just the gains for the last three weeks or so. That shouldn\u2019t cause too much damage for most investors.<\/p>\n But for folks who\u2019ve been chasing this market higher in the face of overbought conditions, even a 5% decline from current levels will be painful.<\/p>\n Now, I can\u2019t tell you when this current rally phase will end. I thought it would have run out of fuel by now.<\/p>\n But I do know a parabolic move when I see one. And the S&P 500 is in the midst of such a move.<\/p>\n These sorts of moves always end badly. And the resulting decline usually gives back all of the gains. So, I expect we\u2019ll see the S&P 500 trade back down below 2700 or so in the coming weeks.<\/p>\n The Volatility Index (VIX)<\/a> did not close back inside its upper Bollinger Band<\/a> yesterday. So we don\u2019t yet have a buy signal from that indicator<\/a>. That leaves the door open for a larger spike higher in the VIX \u2013 which could result in a sharp spike lower in the broad stock market.<\/p>\n Most traders would do well to be a bit cautious right here. The next few days could be rough for the bulls.<\/p>\n Best regards and good trading,<\/p>\n
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