The 3 Phases of Parabolic Arcs

03/04/2014 10:29 am EST


Corey Rosenbloom

Founder and President, Afraid to Trade

Corey Rosenbloom defines the three phases of parabolic arcs and explains how traders can use them to possibly find some good trades.

TIM:  My guest today is Corey Rosenbloom and we are talking about something called parabolic arcs and how he uses them to find good trades.  First of all, Corey, what is a parabolic arc.

COREY ROSENBLOOM:  Sure, Tim.  The parabolic arc typically we can also call a blowoff top or a violent climatic pattern so to think about in terms of accumulation, realization, distribution, or Phase 1, Phase 2, Phase 3.  Phase 1, if we segregate them like that, is a flat or steady period, typically with low volume.  Phase 2, when the price breaks into an upturn or seeing any kind of chart on any timeframe really, breaks into an upturn as enthusiasm picks up, volume picks up.  Other people and social media might pick up in the stock and so that leads to a continuation or a positive feedback loop.  This reaches a climax as the price goes higher and higher and more people get involved.  When more people get involved, it becomes climactic so if you visualize an arc pattern or a parabola, price will trade in that direction but of course, a parabola, if it forms a circle, will bend back on itself.  Price can never bend back on itself so once a price movement on a timeframe goes vertical that is a clear warning sign for potential reversal even though the emotions are high and the trading signal typically comes when price breaks through that vertical trend line. 

TIM:  And that is when traders really, who are inexperienced, they tend to think that is the time to get in and, oh, I am going to miss this trade.  They get in and sure enough, it is the top, so which sign should I be looking for that is going to exhaust itself and start to turn around.

COREY ROSENBLOOM:  In a typical environment, it will be nice to see volume divergences with a typical longer distribution top.  We like to see those.  These climactic arc patterns typically do not show those.  They really have high climatic volume so you don’t see those divergences.  There are not a lot of signals with the exception of price itself and the angle of that trend line and that can be done on any number of chart software programs and just visually.  It is not trend in moving averages.  It is shown with a connection of the lows of the pattern and when price pushes through that, there may be reversal candles, there may be kind of long leg dogis or high value or high volatility single candles.  Those are nice to see.  That occurred in silver in 2011 yet price still made one more high with that parabolic pattern so these things can be extraordinarily risky both for the bulls who are energetic and expect this to continue but also for the bears because price can go even higher and continue this vertical movement well beyond their capacity to absorb the losses.

TIM:  All right, so does that necessarily mean then I should wait for it to turn a certain percentage and head down before I even think about getting short in the case of it going up high and then coming back down?

COREY ROSENBLOOM:  It is preferable to wait as long as possible but these things can be very climatic, which is the point.  It is a sudden and dramatic shift in supply and demand so we can’t exactly time these perfectly.  If you do the daily chart, prefer using options because that way, if you are trying to play, if you just cannot resist a bullish play, try a call and if the price does reverse violently, all you lose is your principal for the call.  If you can’t resist calling a top and when the price breaks through, try a put option, try a straight out buy put option, and that way, if the price does continue going vertical, all you will lose is the principal with which you paid for that contract.

TIM:  Corey, thanks for your time.

COREY ROSENBLOOM:  Thank you Tim. 

TIM:  You are watching the video network. 

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