Microstrategy Stock: A Fresh Lesson In Trading Parabolic Price Action

I am late to the resurgence of Microstrategy (MSTR), but I am finding some valuable lessons in the technical story. MSTR caught fire from an aggressive decision to protect cash reserves with investments in Bitcoin (BTC/USD). As a result, Microstrategy has enjoyed significant price appreciation from the current Bitcoin rally. Along the way, the uptrend in MSTR hit several speed bumps that followed periods of aggressive buying. These periods took the form of parabolic price action of varying intensity. I define parabolic price action as a period of (approximate) accelerating price gains particularly characterized by trading at or above the upper Bollinger Band (BB) (the dark black lines in the chart below). The chart below highlights MSTR’s parabolic periods.

Microstrategy (MSTR) has experienced a variety of parabolic moves, each preceding a notable pullback.

I write about the bearish or otherwise dangerous signal in parabolic price action. MSTR provides an lesson in both the bad and the good side of parabolic run-ups. The chart shows the immediate unsustainability of parabolic moves. At some point, the price action above the upper-BB exhausts buyers. This overbought condition is the bad side and presents an immediate risk for chasing the price action higher. The reaction to the inevitable pullback is key to determining confirmation of an underlying bullishness in the price action.

Until the latest run-up, the pullbacks following parabolic price action found support at the uptrending 20-day moving average (DMA) (the dotted black line). One pullback was too brief to reach the 20DMA. Whether it was a pause or multiple taps of the 20DMA, MSTR flashed entry points with much lower risk than chasing the parabolic action. The subsequent rise from the 20DMA not only confirmed the bullish entry point, but also confirmed that the parabolic price action represented strong and longer-ranged buying interest in MSTR.

Caution from A Change in Parabolic Price Action

The latest parabolic price action and the subsequent selling changed the trading dynamics. As of the latest close, MSTR lost 41% since hitting its all-time high and parabolic peak. The low point completely reversed the last parabolic run-up. The closest such reversal was back in September. In other words, buying power appears more exhausted than usual. The gap down below the 20DMA was the first sign of extra exhaustion and the close that day with a full reversal of the latest parabolic price action provided confirmation.

MSTR now trades in limbo between its 20DMA resistance and 50DMA support (the red line). The stock re-establishes the underlying bullishness with a fresh close above its 20DMA. A test of 50DMA support would become a new test of buying interest in the stock. Bitcoin of course is the big wildcard in determining the bull/bear divide.

The Bitcoin Relationship

The last period of parabolic price action also featured an extreme detachment from the price of BTC/USD. The chart below shows a relatively close, albeit choppy, relationship until MSTR went parabolic to its last all-time high. MSTR peaked a full 10 days ahead of Bitcoin. In other words, while Bitcoin continued to rally, MSTR instead weakened. The relationship re-established itself once Bitcoin fell from its all-time high and took MSTR down further. I stripped indicators from the chart to make the relationship clearer. The purple line represents the price of BTC/USD.

An extreme detachment from the price of Bitcoin signaled a potential topping for Microstrategy (MSTR).

While it is not obvious where the two go from here, the chart above suggests that, for now, MSTR cannot sustain strong divergences from Bitcoin. For example, if MSTR bounces from here while Bitcoin continues to pullback, I will not trust the rally. The good news overall is that both MSTR and Bitcoin remain in well-defined uptrends. Those uptrends provide a strong starting point for constructing new (bullish) trades.

Bitcoin helped MSTR launch out of a multi-year trading range. Yet, MSTR’s move still pales in comparison to the run-up into the dot-com bubble and bust.

Be careful out there!

Full disclosure: No positions

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