The Life of a Momentum Stock

Trading Experts

The Life of a Momentum Stock

As more and more rookies come to Bennett and myself talking about Bitcoin, a second look at the chart gave me an idea on a pretty valuable lesson -- the life cycle of a momentum stock.

1. First these stocks trade in tight ranges as there's not too many eyes on them. If you look bottom left of the Bitcoin chart above, it's just that, trading in relatively tight ranges and not talked about outside of trading circles. 

2. As it begins to advance, more and more eyes get on the stock, and the trading ranges begin to increase. Instead of going up and down $3 per session, it's moving $6. There are large moves up and down as it hasn't really built support along the way up. 

3. It becomes a HOT stock. Everyone is talking about it as it's breaking all time highs and is virtually going parabolic. 

Here are my favorites of the past few years:

ACIA

TWLO

SHAK

GPRO

DDD

So let's take a look at all the similarities:

1) Trading ranges getting much looser and wider

2) Parabolic moves with sloppy price action

3) Inevitable rug pull on all the rookies who started buying the top (These are the people buying Bitcoin right now)

The main takeaway from this is that these charts are not stair stepping higher to create support along the way. Since they have gone on a parobolic move higher, they have an inevitable plunge lower. Remember, when everyone wants to exit, the door is never big enough!

Bitcoin can run and run higher but one thing is inevitable -- there will be a MAJOR rug pull and all the chasers will be the bag holders.

This will be a fun one to watch develop.