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Parabolic moves in a share price can often signal the end of a trend or a sharp reversal in direction. Similar to a rounding bottom the share price rises faster and faster until it is pushing up almost vertical. This move is unsustainable as profits are being made very quickly. If you made a profit of 20%, 50% or 100% in a week, what would you do? The obvious answer is to sell the share to lock in profits. This selling can result in a rapid reversal in the share price. Look at these examples of the price action in Silver. The price took off to the upside climbing more rapidly as the move established itself. Silver increased in value from $5.60 to $6.60 over a month with most of the increase appearing in the last week. This is an increase of 20% in a month, however most traders trading silver would be trading futures contracts, giving a return of 200% or more for the month. The price of silver dropped rapidly as profit taking drove the price back down.
The price of gold behaved in a similar way during the same period of time. Gold climbed rapidly from $390/oz through to $430/oz in a month. This was a 10% move, with futures contracts yielding a profit of 100% or more during this time. Profit taking dropped the price of gold over $10 in a day.
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