Parabolic movers in the financial market refer to a situation where a stock moves sharply higher than how it moves on average.
For example, if a stock trades within a range of between $10 and $12, a parabolic move will be a situation where it moves sharply to $30 in a single day. These moves are most popular in penny and small-cap stocks.
In this article, we will look at some of the strategies to use when trading these moves.
What is a parabolic move?
In an average day, stocks tend to move within a certain range. It is relatively uncommon to see shares of companies like Apple and Microsoft rise by more than 10% a day. It has not happened in recent times.
Yet, a closer look at the small-cap and penny stock industries reveals that it is relatively common for shares to jump or fall by more than 100%. A good example is what happened in early 2021, when the stock prices of companies like GameStop and AMC Entertainment more than doubled within a few days. These are known as parabolic moves.
The moves happen, in most cases, when there is significant demand for a company’s shares than the available free float.
Why Parabolic moves happen
There are several reasons why parabolic moves happen in the stock market.
First, they happen because of recent news. For example, if a relatively small biopharmaceutical company announces progress in its clinical trials, chances are that many people will rush to buy the stock.
This will see the company’s shares jump as they start pricing-in the potential for the company.
Second, earnings are important causes of these moves. In the United States, companies must publish their earnings every quarter. If a company reports better-than-expected earnings results and forward guidance, there is a probability that the share price will rise sharply.
While this price action happens for all companies, it tends to be pronounced for small-cap stocks.
Third, mergers and acquisition leads to significant parabolic moves because in most cases, because an acquirer needs to pay a premium for shareholders of the other company to approve the deal.
It is therefore common for the stock price to experience a sharp move. For example, in early 2021, Slack shares rose sharply after Salesforce announced its plan to acquire the firm.
Other popular reasons why stocks experience these moves are management changes, social media buzz, and a major event.
Examples of parabolic movers
There are many examples of parabolic movers in the stock market. A good example is the price action of SPI Energy in September 2020. After spending in a range of below $1.5 for months, the stock surged by more than 4,000% within a day, as shown below.
A dig deeper into this price action shows that the company has announced its launch of its electric vehicle subsidiary. At the time, stocks of all electric vehicle companies were rising as investors price-in the future of mobility.
Similarly, as shown above, the stock of Slack Technologies rose by more than 83% within a few days after the acquisition news by Salesforce.
How to trade parabolic moves
There are a few strategies to use when trading parabolic movers.
Identify them in charts
First, you need to identify the companies showing parabolic moves. A good approach to doing this is to first identify the firms showing these moves.
As you will find out, you will always miss the first move since they tend to happen within seconds. Therefore, the right approach is to trade the following moves.
Analyze the news
Second, you should try and dig deeper into the news. A simple Google search of the company’s name will show you some of the reasons.
For example, as shown above, in the case of an acquisition, there are no major moves after the news comes out. That’s because, unless there is uncertainty or a bidding war, the stock will remain at the acquisition level until the deal closes.
However, in the case of other news like management changes and earnings, the stock could have some significant fluctuations.
Therefore, always look at the reasons before you trade the stock. If the reasons are valid, the stock could continue rising. If the reasons are minor, it could decline, which makes it easier to bet against the firm.
Identify Support and Resistance Levels
Third, since technical indicators are useless when this happens, it is important that you use your eyes to identify potential support and resistance levels. You can also include tools like the Fibonacci retracement to identify areas where the stock will move to next.
Look at the Volume
Finally, always look at the volume and use risk management tools like stop loss and take profits.
The volume will guide you to understand the demand and supply of the stock. If there is high volume, chances are the upward trend will continue. A stop loss is important to prevent your account from losing a substantial amount loss.
Parabolic moves are relatively common events in the premarket. They refer to a situation where a company’s share price jumps significantly from its normal range. In this article, we have looked at why these moves happen and some of the strategies to use when trading them.
What is your best strategy to make profits from these situations?
External Useful Resources
- Parabolic Moves Always Have Their Reasons – Financial Sense