Classic 3 Day Parabola Pattern

 When trading based mainly off of pattern recognition, with a foundation of fundamental analysis, there is an optimal amount of movement, or craziness.  Too little movement and not many opportunities show up, too much movement and you get into the danger zone, the edge of the cliff where the equity curve can drop off the edge like the head of a sperm whale, when moves go further than what was imagined.  

For example, the Nasdaq in 1998 and 1999 had the right amount of craziness and movement, but the Nasdaq from December 1999 to March 2000 was a parabolic move that blew up mean reversion strategies and short sellers along with it.  

Right now, in late 2020, we are near the maximum range for optimal price movement for trading the short side of parabolic moves in individual stocks.  A little bit more craziness, an extra day of parabolic price increases, a few more bold retail traders, and you push the needle past optimal movement to the stop loss zone and max pain regions.  

The trade in PLTR last week is a perfect example of the optimal level of craziness for shorting.

You had the classic 3 day parabolic move up, with day 3 bringing on huge volume with lots of excitement among retail.  If you look at the reddit wallstreetbets forum, you can get a great sense of what the fast money is chasing.  It is a great source of short ideas.

Another one, which I missed, just because MRNA is not really a classic daytrader stock, until the last 2 days, when its acted like one.  So totally missed the boat there, but if I was paying attention, I would have gone in short yesterday morning.  It was almost a carbon copy of the PLTR trade from last week.  Huge opportunity missed there.  

Despite what looks like easy pickings in the above 2 cases, sometimes you don't get such clean price patterns and the associated euphoria near the top.  Sometimes the patterns can get extended out and overall, the upward price volatility during this bubble phase has to be respected.  Going all in short because a trading opportunity would win big 90% of the time, leaves one exposed to the 10% probability of a black swan happening, with prices going beyond what was planned for.  

I don't use hard stops, and most strategies that use hard stops have deteriorating performance, but that doesn't mean there are points in a price spike where something unusual is happening and its better to cut losses, to avoid a possible downward spiral of forced short covering and further price squeezes.  But the art of short selling is knowing when to cut the loss to avoid blowing up, and knowing when to just hang on through the maelstrom to get to the other side, when the storm clouds clear up.   And avoid covering near the top.  

Overall market looking toppy yesterday, with lots of call volume relative to puts, and also weak bond market which gives index shorts a higher probability.  May get in a little short today or tomorrow.