It sounds like you wish there was a mechanical system to timing the market, which I agree doesn't exist. I'm not presenting "short when it goes parabolic" as a rule, but just an observation of what a bubble looks like across various asset classes. In timing it, you have to understand the fundamentals that are "supposed" to drive that market so you can watch them get farther and farther out of whack. The peak is usually when a palpable sense of euphoria is in the air along with anecdotes of massive dumb money jumping into that market. The decision to sell or go short is based on the fundamentals and watching market participants act foolish. Technicals are used only to roughly time entry and exit points.
(Emphasis mine.)
The point is - how do you know when the dumb money has jumped in and it'll crash versus more dumb money jumping in, driving it higher, and causing you to lose your shorts?
The dumb money is chasing returns, not fundamental value. So once the returns no longer justify throwing dumb money at an overpriced asset, the market changes directions. Changing directions can be as simple as staying flat for a prolonged period of time, causing the euphoria to wear off and the dumb money to start chasing returns elsewhere. It's a play on market psychology and has nothing to do with the market suddenly acting rationally..
Here's a real life case study to help you understand:
In 2006, I acquired some gold at a cost basis of $630. By the time it hit $800 I knew gold was in a bubble. Looking at the charts was enough to tell me that, but like KingCoin has said, how do you know when to sell? The hysteria for gold kept growing. First it was buy gold to protect against inflation. Then during the financial crisis, it was buy gold to protect against deflation. MC Hammer and Ed McMahon were hawking gold on TV while "We Buy Gold" shops were springing up everywhere. The financial media started to buy into the myth and blogs started popping up to pump gold even more. Their were also a lot of Doomsday books being written promoting gold. It just kept growing.
In August 2011, I was on vacation and hadn't been following financial markets very closely. When I left town, gold was priced around $1,650 and the next time I checked it had hit nearly $1,900, after only 2 weeks. That was the first time I felt a wave of euphoria wash over me from owning these stupid chunks of metal. That was also the parabola on the gold chart.
But again, how do you know if that was it? I didn't... But that was when I started watching the technicals closely. I held on watching the price action and seeing if a new high would be reached. The $1,800 price level got tested twice and couldn't be broken over the next year. A new high was not set, so I decided to sell at $1,630, exactly $1,000 higher than what I acquired at. Then wouldn't you know it? The price tested $1,800 once more before the current crash began. I could have scored almost $200 more!! Oh well. I still profited $1,000 on every once of what, to me, is worthless metal.
So let's review:
- I didn't buy at the bottom, but about 2x the price at the bottom.
- I didn't sell at the top, but about 15% from the top.
- I could have made more just by selling a month or two earlier, or later.
All in all, my timing was lousy, but it was still good enough to make a 150% profit (17% CAGR) and avoid the worst of the crash.
The moral of the story is that in a speculative bubble your timing doesn't need to be perfect, just close enough to the tops and bottoms to score most of the gain.