In stock investing, too much of a good thing can be catastrophic.
Every once in a while, a great stock overheats so much, it tops out in a blaze of euphoric buying and burns itself out. It then crashes into a long, deep decline.
That's what chart readers know as a . It is one of the surest sell signals, if you spot it correctly. Take advantage of this to sell into strength.
As seen on a weekly chart, the stock shows a long, steady advance, then its rate of climb suddenly increases. Its chart profile starts to resemble a skateboarding ramp.
This sharp acceleration happens after shares have been climbing for months. Typically, the climax top occurs at least 18 weeks from the out of a base.
One of the clearest signs a stock is overdosing on gains is a rapid rise of 25% to 50% in one to three weeks. Sometimes, it starts with a breakaway gap or a jump out of a short consolidation.
Often, there are other signs of unusual strength during the climax run.
For example, the stock may see the biggest one-day point gain since not just its last breakout, but its first-stage base. Or, there's an unusually long winning streak, like seven or eight days in a row.
The stock may mark the largest weekly price spread since the start of its long run.
One of the classic examples of a climax top occurred in 2006 with a stock called Titanium Metals (TIE).
The company was part of a metals rally at the time. It had been advancing since a breakout in August 2004. By mid-April of 2006, it seemed its ascent could not be stopped.
Shares soared 44% in a three-week span 1. The weekly price spreads in the week ended April 21 and May 12 2 were noticeably longer than any other time in Titanium Metals' chart.
The week it topped, the stock surged as much as 22% but erased more than three-quarters of the gain 3. After a brief bounce off the 10-week moving average, the stock kept falling, The stock lost more than half its value in less than five months, falling to a split-adjusted 22.77 by late September. It recovered for several months, only to make a 90% depression in about two years. Precision Castparts (PCP) acquired Titanium in January of this year.
Multiple stock splits preceded the top, as often happens with climax tops.