Friday, April 8, 2011

Stock Tips: 6 Signs a Stock Is Nearing a Top

How can you tell when a market is exhausted from a long term up-trend? 
The current market leaders will start to form climax tops after huge gains over the past 6, 12 or 18+ months.

So, how do we identify a climax top?
The following characteristics are typically found in a stock that is forming a climax top:

  1. A quick run-up or accelerating gains over a short period of time after a long term up-trend. The gains will be much larger during this short term run, proportionally, than the entire up-trend.
  2. A large gap-up after several months of a steady up-trend. Investor's Business Daily (IBD) calls this an "exhaustion gap".
  3. The largest daily and/or weekly volume of the entire up-trend.
  4. A large single day point gain, the largest of the entire up-trend.
  5. An intraday move to new highs on above average volume but a close that results in a loss.
  6. A stock that is trading 100% above it's 200-day moving average. IBD states that a stock trading 70% above its 200-day moving average is showing exhaustion.
Take a look at the $TZOO Travelzoo charts (daily and weekly).

Weekly Chart
As you can see, TZOO has confirmed the following red flags for a climax top formation:
  • 10 of the past 13 days have been up days.
  • A 68% gain over the past 13 trading days and a 100% move over the past month. Stock is up 900%+ since March of 2009.
  • The largest daily and weekly volume of the entire run.
  • A new high intraday with a close that resulted in a loss (today: a new high with a reversal to close down 3.69% on volume 485% larger than the average).
  • The stock is trading more than 130% above its 200-day moving average.
With all that said - what should you do? I suggest that gains are locked in, at least a portion of your position 1/3 or 1/2 at a minimum.

In addition to locking in individual gains (in examples like TZOO), I highly suggest that you start to watch all market leaders and the general market indices for red flags.

Daily Chart 



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