Sell Winners Like A Pro: Fourth In A Series Among leading stocks, many end with a fast run-up that's just too good to be true.
It's called a climax top.
You want to be ready to sell during this outlandish run, but it takes a calm mind to recognize the signs.
The climax run involves a sudden advance at a much faster rate for one or two weeks after a rise of many months. Usually it can't occur earlier than 18 weeks after a first- or second-stage breakout, or 12 weeks out of a later-stage base.
Here are the signs of a climax top: • 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.
• 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.
• 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. Baseball Hall of Famer Ted Williams couldn't bat .875 for long. A stock also seldom can sustain an unreal pace.
• Largest weekly price spread: Like the first item, a stock is often close to a peak when this happens.
In December 2006, China Life Insurance (LFC - News) began a run that led to a 57% gain in 12 sessions 1. On the ninth day, the stock was 103% above its 200-day line 2. Two days later, the stock split 3. On Jan. 3, the stock jumped 10% in an exhaustion gap 4. The run was over.