A Euphoric Rally into Collapse Lesson from Square SQ
Here’s one for the lesson books – Square (SQ) had a euphoric or parabolic rally that gave way to the all-but-inevitable snap-back crash straight into a key support price.
Here’s the Euphoric Rise that gave way to the Stellar Collapse:
Square (SQ) is a new stock that you may not have traded yet but it’s sporting a classic pattern of a euphoric (unsustainable) rally that just gave way to a textbook collapse event.
Despite a strong higher timeframe uptrend, price stabilized (intraday chart) at the $32.00 per share level and built a rally toward $38.00 per share.
At that point, a clear Ascending Triangle Pattern developed which triggered a bullish breakout entry above $38.00 on November 10th.
Price got ahead of itself, surging straight up into a “Parabolic Arc” or “Euphoric Top” pattern that set the stage for the pain of a collapse after the pleasure of the euphoria.
Traders are encouraged to avoid trading INTO the late-stage euphoria (bullishly) due to the risk of a price collapse.
Similarly, bears are discouraged from short-selling a euphoric pattern event like this because price can remain overbought and irrational – and surging higher – beyond your ability to sustain a reasonable risk or stop-loss strategy.
VERY aggressive traders can engage short on the breakdown – in this case a gap – beneath the rising “arc” or adaptive trendline.
We’ve achieved our first target of the initial breakout from the original Symmetrical Triangle.
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Corey Rosenbloom, CMT
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Corey’s book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).”