Among leading stocks, many end with a fast run-up that's just too good to be true. It's called a climax top. At some point in the advance, a stock will sharpen its climb. In some cases, the long advance has attracted enough attention to whip up a buying frenzy among individual investors. The news media may latch onto the stock or its industry, blowing more air into the bubble. These late-comers provide the demand liquidity needed by the institutions to make a clean getaway. At last, the demand bubble exhausts itself, and the stock plunges back to earth.
Some of the characteristics of a climax run include:
Generally occurs at least 18 weeks after a breakout from a first- or second-stage base.
Largest daily price gain: If a stock had a run-up for many months from its original buy point and then shows the biggest one-day price increase of the entire run, watch out! This usually occurs very close to a stock's peak. Note: This is about price, not percentage.
Heaviest daily volume: The ultimate top sometimes occurs on the heaviest volume day since the beginning of the advance.
Largest weekly price spread: Like the first item, a stock is often close to a peak when this happens.
Exhaustion gaps: This is a gap-up in heavy volume. This is normally bullish when a stock is breaking out of a base. But it is a bearish sign when it occurs apart from a base after a long run-up.
An unusual spurt: The stock will jump 25% to 50% in three weeks or less. Don't get greedy; this is not a sign to hold for more. A new high on very high volume, but ending the day in the lower portion of the day’s range.
Extended to a rare degree: A top-rated stock often becomes extended 100% or more above the 200-day moving average. This alone isn't an automatic sell. Research shows the average big winner reaches 111% above the 200-day line at the peak. The top 10 percentile of big winners, however, can reach 189% on average.
A too-perfect streak: Seven of eight days are up, or sometimes the ratio is even better. A stock also seldom can sustain an unreal pace. On a daily chart, look for something like seven up days in eight sessions, or eight up days over 10 sessions. The stock's run should be white-hot.