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.
Related or Semi-related Video
Finance: What is a Chartist?26 Views
Finance allah shmoop What is a chartist Well here's a
chart and here's a chart and here's a chart All
right Well these are pages from the investing bible of
a chartist A chartist is an investor really a traitor
as they tend to own stocks for a much shorter
period of time than a longer term Really invest or
type person a chartist relies solely on the patterns The
pattern's right there These are all patterns imputed by the
charts that they you know sitting poor threw for hours
and hours So check out this chart see how the
plotted data closely follows the characteristic line there The characteristic
line basically is plodded through all those dots Yes So
they're going to stare at that try to figure out
where that line is going in the future right Get
the crystal ball or all right Well let's look at
this one where the data forms what looks like Well
the head and shoulders of someone who you know doesn't
have a neck that's Just common pattern in trading And
you know if you stopped looking at it and two
thirds of the way through there it's heading down Well
Maybe you'd be short the stock for a few days
and then you see it bottoming and then you'd be
long and try to make money that way Good luck
All right len look at this chart Where is right
here where the data appears to We'll break away from
the established pattern which was all just kind of boring
Lee along down here And then suddenly everything goes up
Yeah start doing its own thing Well maybe the company
reported a good quarter or ah you know the government
cut taxes again Everything went up So these were the
tools of the chartist The chart's a chartist is the
opposite of a fundamental investor meaning that she doesn't know
or care what the company does for a living Really
she doesn't care about their p e ratio nor their
profit margins nor their debt levels on their balance sheet
nor much of anything fundamental about how their business runs
Chartist just care about the pattern they glean from the
charts and all the charts always work until they don't
And what happens when the meteor hits that is that 00:02:06.0 --> [endTime] predictable on a chart Ah
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