I must be getting old and grumpy as my latest strategy is to spot and short bubbles as they burst. I successfully predicted the Netflix bubble and the gold drop from 1900 to 1537.
I have been analysing as many bubbles and drops as possible, going back 10 years by looking at charts.
A bubble and its demise is defined (by me) as a long bull run which goes hyperbolic and then either does a double top or just crashes suddenly by at least 40%.
It seems to me that this is such a common thing, there is always a bubble happening somewhere and it’s just a matter of waiting and biding time until a bubble breaks. This breaking is what intrigues me. Why does a stock just drop through the floor almost overnight.
It seems that the best drop moves occur when you have a popular stock that makes it into the news as a buy. Once you see the stock in the Times or Daily Mail as a big winner, you know it’s time to start planning to get on the short side. Then you wait until the market is weak, and critically a bad piece of news comes out about the company.
Then only enter once the price has already begun its decent past its last previous big drop. This could be a 200eMa break, or perhaps 10% or perhaps a round magic number. Each stock is different.
The next trick is getting out at the right time. Looking at a small number of stocks that have followed this pattern, it seems that after a huge drop the market will open much lower than previously closed and then rise all day. It then hangs around bouncing a few % points up and down for a few weeks.
The trick is to get out after market open in the first hour before the rise.
Following this method would have made 1000s of points on NFLX and did make me 200 points on gold.
My next target is CMG – Burritos. How can a burrito company be worth $300?
Feel free to comment and shoot this strategy down! All comments welcome.