A couple of weeks back I posted this chart of Boeing (BA) on StockTwits and Twitter:
— JB Marwood (@MarwoodJoe) March 21, 2016
Boeing was actually on my watch-list to buy at the time but I’m never comfortable buying into parabolic looking charts like this one. You can see that the price bars are going up in an exponential type way as though the stock is going to the moon.
Whenever I see a parabolic move like this I sell my position and look for a reversal. In fact, these patterns are my favourite for shorting stocks.
Why are these patterns so profitable?
Quite simply, no stock can keep going up forever. When traders see a chart like this they book their profits and this causes the stock to retreat. As the stock loses momentum more longs close their positions as they don’t want to give up their profits and the downward move intensifies.
Here’s a chart of where the stock is trading now. It’s already dropped around $7. The attacks in Brussels probably hurt momentum as well since this is a major airline.
All in all, that’s a quick profit of around 5-6% in 9 days. The stock will probably go lower from here but I remain neutral now that the parabolic bubble has been popped.