Blow-Off Top

Investors might be ready to blow their tops when they see a chart pattern with a steep rise in prices, followed by a rapid drop.

A blow-off top often happens after a big news announcement or rumors about an exciting initial public offering (IPO) that turns out to be...all hype.

Let’s say Miracle Pharmaceuticals had some promising clinical trials for a drug to cure diabetes. Word spreads rapidly that they are going to get approval from the Food and Drug Administration (FDA) any day now, so their stock shoots for the sky. Then news spreads through the grapevine that the clinical trial volunteers are starting to grow an extra finger, so the price tanks rapidly.

If you bought at the top, “experts” say you will just have to hold the stock for the long term, or sell at less of a loss the next time it bounces up a bit. The key to identifying a blow-off top before it’s too late is to look at volume. You’ll see a large increase right before it hits a peak, with a massive sell-off as it starts to go down.

Other tips for picking a potential blow-off top is to see if the stock has had few if any dips in price for at least 6 months, and has gone up by 100-500% or more.