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 Breakaway Gap?7 Views
Finance a la shmoop.. what is breakaway gap? well Letterman has one yeah that but [David Letterman's front teeth appear]
here we're talking about a trading pattern like on a stock chart like this
thing where the breakaway gap is a sudden change in trading pattern like
you're walking along just fine and easily recognized in comfy double bottom
pattern like this but then blam the company reports an awesome quarter in [Stock chart dramatically rises]
the stock zooms upward outside of the pattern it goes from here to here and
well now what like there's no pattern yet so what do we do well depending on
your lean prayer might help is the stock heading down now to normalize or up more
because now everyone thinks it's the next Google and wants to own it for the
long run so breakaways go up like this and
sometimes they go down like this but either way they break away from a [Arrow points to stock charts breakaway gap]
pattern and yeah, clearly this was not the next Google! oh well
Up Next
What is an Aggressive Growth Fund, A GO GO Fund, A High Octane Fund? An aggressive growth fund (also referred to as GO GO or high octane) is a type...
What is a Chartist? A chartist is a trader and/or analyst who relies on technical analysis and charts in order to make decisions for trading the ma...
Technical analysts don't care how companies make their money or how they run their business; they're just interested in the numbers. The data. Yeah...
What is a hot issue? A hot issue is basically just an IPO that people are really psyched about. This does not necessarily mean that the company is...