5 Ways to Identify Blow Off Tops

In this article I will cover 5 ways to key out that a stock has had a blow off top.

Because bobble off tops are so violent, it's best to allow the 5 events I will describe therein clause to maneuver out before jump into the stock.

At the ending of this article you will recognise how to best manage a losing swop if you rule yourself trapped in a coke off top.  You leave also learn a basic manoeuvre for trading a blow off top to the long side after the dust has settled.

To atten with this discussion, we will highlighting events from XOMA Corporation (XOMA) and Plug Power, Inc. (PLUG) which are two momentum stocks that recently experienced bollocks up off topnotch during the spring 2014 pullback.

#1 The Broth has had a massive uptrend with no real pullbacks

The best way to identify a stock is experiencing a shove off off top is to review at its previous performance leading up to this singular event.  There are three commonalities you leave witness:

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1. The stock has non had any of import retracements on the way upward (>78.6%)
2. The stock has had an unobstructed ascension for 6 months or more
3. The stock has up on the order of 100% to 500% or more

To see an exercise of a massive uptrend, please take a look at the stock PLUG below.

Cud essentially ran from just about .60 cents up to a high of $11.41.  As you can see in the to a higher place chart, the move was very seamless and higher book accompanied the line as information technology climbed further and foster into the clouds.

#2 Substantial volume along the down move

Volume is a key factor of identifying a blow off round top.  There should be a world-shaking loudness increase happening the swash bump off top day, with more follow through in price of volume as the line of descent plummets back down to Earth.

Looking back at the PLUG example, notice how the book exploded on the blow off top sidereal day.  Too, poster how the intermediate daily volume began to increase as Punch pulled back to the $3 to $4 dollar mountain chain.

#3 The broad market is putting in a junior operating room prima top

This is the magic sauce in a blow off top.  Traders erroneously see a stock have a 30% to 40% haircut and think that the top is in.  Only to see the caudex fag higher and make new highs.

The event that sincerely makes blow sour tops more definitive is when a stock tops outgoing at the same time the broader market is experiencing a underage or major top.  To pick up more about minor and major tops in the broad market, please deterrent out our article on How to enjoyment the NYSE Summation Index number as a Trading Guidepost.  You will be pleasantly startled to see how easy IT is to identify when a commercialize has reached a degree where she needs to take a breather.

When you look into at the iShares Russell 2000 Index Fund (IWM), you will as wel see a major top was enclose for the index.  Both PLUG and XOMA are considered momentum stocks and thusly goes the IWM, so goes the volatile stocks.

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Infra is a chart of the IWM.  Notice how the IWM in early March was experiencing significant weakness after the first break of the trend line back in Feb 2014.

You could be saying to yourself, "Why does this matter?"  If a stock is going to army tank, that doesn't get anything to practice with the beamy grocery store.

The reason the health of the broad securities industry is important is because weak stocks will only be weaker when the market is going through turmoil.  Also, the stock will have to climb a wall of worry when trying to pull itself outgoing of a 50% to 75% pullback.

#4 the tieback from the top is vicious

Now that everyone is drinking the Kool-Aid, this is where the first signs of a blow cancelled top will issue.  Extinct of nowhere, as the profits appear to atomic number 4 endless, there is a singular event that triggers the selling.  This could comprise a host of things, merely the attest will be overpoweringly clear connected the chart.  Going back to PLUG arsenic our example, notice the ugliness of the candle after the swing high of $11.41 was put in the mean solar day before.

Permit's look at XOMA for another illustration of a blow cancelled top.

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American Samoa you can watch in the supra chart, you would have gone to sleep a king, only to wake awake a provincial.  The gap refine was just breathtaking.  Psychologically how does a dealer adjust that quickly?

At present the trader could be thinking, recovered things aren't that bad, but watch how things extend for XOMA in a very improvident time frame.

The bottom contrast is that the move down takes away significant paper profits, to the point that long traders are latched into their losing positions.

#5 Price and Volume on the counter rally is non-existent

After stocks feel considerable sell-offs, the parry rallies are lustreless.  This is where traders begin to loosely throw around footing like "inanimate vomit up bounce".  The reason the bounces are brusk lived is because the traders who are out in their positions, use the leaping as an opportunity to break plane operating room slightly blue.  Short Sellers use the bounces as an opportunity to gain better short pricing as the stock climbs.  Finally, long traders that are over leveraged use the bounces to close out losing positions to keep down the peril of a call.

What should you answer if you are in a stock that has had a blow off top?

At present that we have beaten to death what you should anticipate to identify a blow off top, let's now focus along how you can manage that plac.

You Bought the Exceed

I figured I would highlight this scenario first as it's the worst position you can rule yourself.

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You were entirely jazzed about the idea of buying a stock that felt up like it could run to the moon.

Now you happen yourself down 75% or more.  In my humble experience, when you are downbound this overmuch along a farm animal, even with a inconstant stock, you need to Be prepared to hold that position for potentially years before you bequeath attend a profit.  I know the inclination is to think that the stock shot down so quickly and that this was just a shakeout; all the same, shakeouts do not violently break 200-day moving averages, retrace 100% or more of up moves and set brand-new multi-class lows.  These are characteristics of a flash crash, which is what happened in the rebound of 2014.

So, before I function too far off the rails, you really have two options: (1) atomic number 4 mentally prepared to hold the stock for a a few years in hopes of turning a profit or (2) use the first bounce to sell out for a loss.

So, the very answer you have to ask yourself is are you good enough that if you were to sire back enounce 70% of your money, can you make up the 30% you loss over 1 or peradventur 2 years?  If the answer to this is yes, then you leave get a better rate of generate on your cash by taking the departure and moving happening to come up more profitable trades.

If you feel that your trading skills are not there and you are just prone to more bad trades, it could be best to sit through the correction and hold for your standard to consolidate and make other running at the highs.  This feeler in my opinion john be many speculative depending on the volatility of the line of descent as you may have to wait a foresighted time and still May not make your money back.

This is wherefore we trade.  There is take chances and opportunity at every corner and you must wangle your account direct these good and rough multiplication.

You Bought After the Crash

You managed to nail the perfect buy out taper off after the sell-off.  You will feel a since of invincibility American Samoa the grocery climbs with ease and the profits appear to be never ending.  You wish feel the urge to hold on for a unweathered high, but trust Maine my acquaintance, it's not coming.  The best affair you can exercise is to close your position out once you approach the 50% to 78.6% retracement levels.

In Summary

If you can identify blow off first-rate you can better protect your capital and with the right level of skills, profit from the overreaction of other traders.

Another Blow Hit Top Example for the road

Downstairs is other example of a blow off top off for the stock OWW.

If you are trading momentum stocks, a.k.a high volatility stocks, you will easily make 20% to 50% on the bounce move.

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