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Wait for the first crack.

The parabolic short is described publicly as the riskiest of the three setups if done wrong. This guide sets out what has been published about it and the specific risks of shorting a stock that is still going up.

7 min readSetup study

The rubber band idea

In his three-setups article, Kullamägi compares stocks to rubber bands: when they get very stretched in the short term, they can snap back hard. He calls this by far the riskiest of his setups if done wrong or if stops are not obeyed. A summary of the setup sits on this site's parabolic reversal page; this article goes through the details.

How stretched is stretched

50-100%

Larger caps

Up 50 to 100% or more in a few days or weeks.

300%+

Smaller caps

Up 300 to 1,000% or more.

3-5

Up days

Up three to five or more days in a row.

The article notes two paths into the setup: some stocks trend higher for weeks or months and then accelerate, others explode from nowhere.

The three entries

The article describes three ways in:

  1. Opening range low. Short the break of the 1-minute or 5-minute opening range low.
  2. First red 5-minute candle. If the stock goes straight up from the open, wait for the first red 5-minute candle.
  3. The VWAP fail. Wait for the first crack, a bounce back into VWAP, and a failure there, such as the first red 1- or 5-minute candle into VWAP. The article calls VWAP the only intraday indicator really used.
Do not be earlyThe article stresses waiting for the right setup and letting less patient short sellers get run over first. Shorting strength before it cracks is the mistake the setup is designed to avoid.

Stops and targets

The stop is the high of the day, or for the VWAP entry, a reclaim of VWAP. The article says the key is a relatively tight, defined stop. The target area is the 10- and 20-day moving averages, where it says these stocks usually bounce.

It also sets expectations: unlike breakouts and EPs, where reward can sometimes reach 30 to 50 times the risk, this setup is described as closer to 5 to 10 times, with a probably higher win rate for those who wait for the best examples.

Risks specific to shorting

  • Unlimited upside. A long can lose at most its full value; a short has no ceiling.
  • Borrow. Parabolic stocks are often hard to borrow. The FAQ says access to good, sometimes expensive locates comes through brokers most retail traders do not use.
  • Halts and gaps. A halted or gapping stock can jump past a stop.
  • Self-reported history. The FAQ states that the biggest losses usually came from shorting.

The mirror image, a long bounce after a collapse, is covered in the parabolic long.

The parabolic short review

  1. Measure the run: percent gain and number of up days.
  2. Confirm shares are available to borrow, and at what cost.
  3. Wait for a defined entry: ORL, first red 5-minute candle or VWAP fail.
  4. Set the stop at the high of the day or a VWAP reclaim.
  5. Mark the 10- and 20-day averages as the target area.
  6. Size for a gap through the stop, not just the stop.
Setup description summarized from 3 timeless setups (Jan 2021); borrow and loss history (self-reported) from the qullamaggie.com FAQ. The general shorting risks listed are standard; the review list is this site's own. Educational content only, not financial advice. Trading can result in substantial loss.
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