Hi folks,
I wanted to create an educational post examining the recent price action of $AI. Quick parabolic moves often open up opportunities for short term traders to capitalize on. Even if you "miss" the move on the way up, many times the move on the way back down can be just as dramatic.
Today we will be looking at how $AI became a short candidate after a parabolic run higher! We will examine how you as a trader could set up a trade of your very own to exploit similar patterns in the market in the future!
After tracking $AI's movement a few days prior I noticed a heightened sense of indirection and FOMO around the price action in the stock on February 6th, 2023.
I tweeted my observations to Art of Trading members:
As a trader 3 key technical traits should stick out here! In this next chart lets examine those!
The 3 key technical traits are this:
Extreme RSI reading:
RSI was sitting at an "extreme overbought" level 88.37.
"Topping Tail" candlestick pattern:
Here we see an extreme daily move where the stock traded as low as $26 and as high as $31 in a single day. Price action was extremely volatile but by the end of the day price action closed nearly the same as it opened. A sign of indecisiveness from the market!
Dramatic daily volume:
In the case of the massive daily volume the stock traded through this day, this can signal 2 things. Possible Fear of Missing Out (FOMO) from market participants trying to chase the stock higher and secondly a dramatic "blow off top". This was the highest volume day for this stock in its history yet price barely moved from the opening to closing price even though the stock made a near 20% price swing from lows to highs on the day!
With these 3 technical characteristics at hand as a trader we can make an educated "guess" as to where the stock might be heading next!
But how do I trade a setup like this?!?
The "Topping Tail" candle stick pattern is the key to this technical, short term setup! Lets quickly examine a topping tail candle stick pattern.
A topping tail candle stick pattern can present itself in many different forms. It could look something like these varieties:
Topping tail candle sticks have one very important trait in common. A very long wick or upper "tail". They're very easy to spot. These candlesticks often present themselves after very quick parabolic moves in a stock or at major, long standing, resistance price points. In the case of this $AI trade it was after a dramatic, parabolic move higher!
As a short term trader you have precise price points to build your trade off of with this candle stick setup. With topping tail patterns your idea stop is slightly above the top of the candlestick range. With $AI it would have been slightly above the $31 price point.
Generally speaking, especially with a stock that is seeing extreme daily price movement your ideal entry for a setup like this is near the close of the day. Ideally you want to see the stock close the candle stick out before fully committing to the trade. There is nothing worse than trading a setup like this a little early only to have the price immediately rally against your entry and take you out!
Sizing is the next important part. Knowing that the stock is likely to make quick, dramatic moves you want to size a trade like this smaller than your usual trades. 1/3rd is usually a good starting point!
Lets take a look at what this trade setup would look like, annotated on the chart!
Stop Loss:
Slightly above the topping tail candle top range.
Ideal Entry:
Near the end of the day to ensure that the topping candle formation stays intact!
First Target:
Near a price point before the stock made the dramatic move higher. In this case $24 - $23.
If the trade works in your favor this is what you could potentially expect in the way of price action the very next day:
On February 7th the stock traded down in a methodical fashion. Never trading back above the previous day's closing price, trending down for most of the trading day. See how the stock traded back into the $23 - $24 price point? In most cases you, especially with a volatile stock of this nature closing the trade profitable in a short time frame should be your #1 priority especially after a single day event such as this! If your strategy is to take partial gains as the trade works in your favor that's fine too. Just be aware of the potential volatility the trade may face!
So how did this stock chart develop over the next few days? Lets take a look! I tweeted this:
After identifying the initial setup on February 6th, this day went on to be the highest volume day ever in the stock. You can see the dramatic move lower into the first potential target on the February 7th and then another price spike in the stock on the 8th. This is exactly why these types of trades are very short term in nature. Although it should be noted that the price action on the 8th never made it back above the $31 level made on the 6th, but that sort of move could spook many traders out of a perfectly good reversal trade. Then, Friday to close the week the stock made another pullback, back below the lows made on Wednesday!
This concludes parabolic short term trading guide! I hope you enjoyed it!
Enjoy more short term trading ideas like this as a Art of Trading private member!