A price bubble is an unsustainable price increase
that occurs when prices rise at a very rapid rate, usually for a
period of months. The arithmetic plot of a price bubble takes on
a parabolic shape as prices move straight up in the final stage
of the bubble.
Terra Nitrogen (TNH),
a provider of nitrogen fertilizer products, serves as an example
of a price bubble. TNH peaked at $140.35 on July 3, 2007 and closed
at $77.97 on August 9, down 44 percent from its peak.
When prices begin to decline, the arithmetic chart usually does
not give good visual clues how far prices can fall before they reach
a key support level. But converting prices to their logarithmic
value and plotting them on the log scale chart gives you a clearer
view of the price progression.
The log chart tends to flatten the extreme highs of the bubble
so you can see support levels. For TNH the key support level is
around $30.
A closer view of the log-scale chart shows the price channel of
the bubble with its upper and lower boundaries in green. Notice
the support level at around $30.
The red dashed line represents a possible price path for the stock.
Related Articles:
Anatomy of a Bubble Top
Price Patterns - Bubble Top Is an Extreme
Pattern
Price Patterns - Bump and Run
Reversal Top Defines Price Bubble
Price Patterns - Support Levels
May Constrain Price Downsides
Price Upsides Often Occur in
Three Stages
Using Logarithmic Scale Price Charts
to Spot Tops
Posted August 10, 2007.
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