Too Much Too Soon
When using technical analysis, traders will look at long histories of price points for a certain stock, spanning many months or even years. A chart containing averages of all the prices for that stock over time will start to show certain patterns, like the bump and run reversal. When examined by the trained eye, spotting patterns like these early can help investors know what to expect from a certain stock before it even happens.
When examining your daily charts, it’s important to know some of the telltale signs to look for in a bump and run reversal. First of all, you’ll want to look for a sudden spike in the price of the stock that continues for several months. This is usually caused by excessive speculation that has driven the prices up too far, too fast. Because this is a reversal pattern, you can expect that at the end of this premature hike, you’re going to see a fast plummet. The sudden spike is referred to as the bump, and the resulting decline is called the run.
It’s important to note that even though speed is the culprit driving this pattern; it can be slow to form in some cases. Nevertheless, it can be applied to daily, weekly or monthly charts. Technical analysts use the bump and run reversal pattern to help them identify speculative increases in the market that won’t be able to sustain themselves for a long period of time. If you spot this pattern forming in your own charts, take it as a warning. When stock prices rise very quickly, forming the left side of the bump formation, the coming decline in prices can be dangerous.