If you're telling yourself that you know how to speculate in parabolic rallies and won't get caught in this one, you might be right, but only if you can remove your human nature. This is because the final days of parabolic rallies are characterized by irrational belief in the greater fool theory. That the concept that it doesn't matter what crazy extreme a stock is at the time you buy into it, as there's always a greater fool than you who will buy it from you at a higher price. The greater fool theory works perfectly until it becomes clear that the face in the mirror is the greatest fool. Things get very painful from there, as prices fall even faster than they rose.
Following is the updated monthly bar chart from our analysis of Nvidia stock, with some benchmarks added to highlight how close to the reversal Nvidia shares now are. Notice the proximity to the olive/gold line, which is the two-standard-deviation band (which controls 95% of normality); the orange line, which is the three-standard-deviation band (controlling 99.7% of normality); and the red line, which is the four-standard-deviation band (controlling 99.9% of normality). Any of these extremes can be reached this month as the mania blooms. History shows, however, that the only survivors will be those who exit a little early, rather than a little late.Click here to see the following chart in a new window
The expectation for the quarterly results is tremendous. The most common rationalization is that the company's chips are dominating the field in the automated, self-driving and connected-car industries. In 1999, the rationalization for Qualcomm's infinite rise continuing had a similar flavor. Nevertheless, Qualcomm stock couldn't avoid a post-parabolic crash. Neither will Nvidia. History shows that all parabolic rises end with prices returning at least to the origin of where the rise began. For these shares, that could be one of the two support zones highlighted in green on the chart. Either $77 +/-$8 or $30 +/-$5 appear to be the lift-off points of the vertical phases of the rally.