Parabolic Arc chart patterns form when a steep rise in prices caused by irrational buying and intense speculation hits its apex. Parabolic Arc patterns, formed in strong bull markets are rare, but they are reliable. These patterns trend gradually, making higher highs and lower lows in the beginning stages, but irrational buying and speculation generates a strong rally to push prices vertically which is always followed by a steep sell-off.
A Parabolic Arc is a reversal pattern and has a very predictable outcome ,,,, a significant correction. Usually ranging from 62% to 79% of the parabolic price rise and why those lucky enough to be in one on the upside, need an escape plan when the rug eventually gets yanked out from under them.
Why they repeat – Human Psychology
Parabolic Arc patterns consist of both panic buying and panic selling scenarios. As a stock breaks out and starts to rise, investors tend to feel its rising cycle is never going to end and build confidence based on hysteria. This misjudgment provides a blind faith in investors as the stock chart takes on an exponential curve-based shape. In the state of a rising Parabolic Arc, they typically see price continuing to rise without pause and quite often with a series of upside gaps. In its last stage, Parabolic Arcs move vertically as panic buying (blow-off tops) extends in an absence of sellers quite often on some unfounded expectations/news/events. Most of this climactic buying is driven by momentum and neophyte traders who fear being left behind. Finally, reality sets in, momentum diverges with price and buyers dry up. This usually coincides with a negative event or unfavorable news. This initiates panic selling and cause prices to reverse dramatically. The initial buyers and smart money take profits quickly, followed by the more patient owners and then the buy-and holders who eventually give up and throw in the towel (just about the time the smart money is starting to accumulate shares). A great example of smart money picking the pockets of the retail investors. Wash, Rinse. Repeat
I have shown completed examples of these in past blog posts but wanted to bring one to your attention that is still rising and not yet reached its upper apex. As you can see in the chart of FTNT below, price has been in a relentless uptrend since breaking out of the (blue) consolidation box and created its second touch of the parabolic arc. Price sits at the highest point above its rising 200-day average ever at the same time it RSI momentum is waning and diverging from price. The stage is set.
I don’t have a clue on when FTNT’s rise will terminate, it really doesn’t matter as all you have to do is follow price. From the appearance of the chart price and volume patterns it looks as if it might have some legs and could run a bit more. Either way, it is getting close. Those lucky enough to still own this (congrats Nick), make sure you have an exit plan that will insure you keep the majority of your gains. I would expect a swift and dramatic decline and as such those nimble enough to short the stock will likely have a high probability profit setup on a confirmed breakdown below the arc.