What is a Parabolic Move?

| October 14, 2010

Last night, a reader questioned our characterization of the current short-term move in gold as “essentially parabolic” and we wanted to clarify those remarks. In purely mathematical terms, a parabolic move is an exponential rise.

When it comes to chart analysis, we define a parabolic advance as an uptrend during which the angle of ascent increases as the move matures. There are certainly other ways to define a parabolic move, but this is how we characterize moves that have begun to rise at an unsustainable rate. The easiest way to identify such a move on a chart is through the use of power uptrend support lines. Below is a daily chart of gold with the long-term uptrend support line and two power uptrend support lines.

In general, if a rally has more than one power uptrend support level, it has moved into our category of a parabolic move and is therefore rising at an unsustainable rate. In mature markets, these types of moves nearly always lead to elevated volatility and are followed by relatively violent corrections. Further, as you might expect, the degree of the subsequent volatility and the violence of the inevitable correction tend to be proportional to the magnitude of the advance. Granted, the current move in gold is certainly not an extreme example, but it does meet our minimum criteria. Of course, others may use different metrics to identify parabolic advances. Chart analysis is both a science and an art, so there are many different methodologies and techniques. As a professor of mine used to say, the best thing about standards is that there are so many of them.

Category: Commentary, Market Update

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