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Railroad Tracks Signal Trouble After Winning Stock's Long Run

When railroad crossing gates go down, some drivers think this is a good time to thread through the gates and step on the gas.

The best case scenario is you cut a few minutes off your commute. The worst case scenario is you lose your vehicle and your life.

Does that sound like a good bet

Investing has a similar bad-bet scenario. It's a weekly chart pattern called railroad tracks.

The pattern involves two weeks that essentially cover the same ground with nearly the same close. If you look at the two weeks, they look like two rails with a tie, hence the name. This pattern often occurs near the top of a climax run.

Railroad tracks point to distribution, i.e., professional selling. Because they often occur near a top, the pattern is a sell signal.

This is where the bad bet comes in. You can ignore the railroad-tracks pattern and you might squeeze an additional rally out of your investment. Then again, you might get walloped. Adult investors don't try to get the last dollar out of a hot stock's uptrend. They leave that play to the kids.

Railroad tracks are a fairly rare pattern. A search of IBD's archives found eight since 2006.

Cbeyond (CBEY), a provider of IT and communications services, formed railroad tracks in the week ended Dec. 15, 2006. The stock then lost 16% over the next 15 weeks. That's not a dramatic drop, but dead money for 15 weeks isn't what you want.

Smith & Wesson (SWHC) sketched railroad tracks in the week ended Sept. 7, 2007. The stock initially dropped 15% and then recovered before dropping 41% in the week ended Nov. 2. That was only the beginning. The gun-maker stock eventually fell 93% off its high.

Two shippers TBS International and Excel Maritime formed railroad tracks in late October 2007. Losses were 73% and 68% in less than three months. Both were eventually delisted.

First Solar (FSLR) popped 20% after forming tracks Dec. 7, 2007. It plunged 49% in four weeks.

Stec (a tech company bought by Western Digital (WDC) in June) finished tracks Sept. 4, 2009 1. The stock rose as much as 7% the next week, then skidded more than 70% in three months. (See chart above.) Volterra Semiconductor (acquired by Maxim Integrated in October) laid down tracks in April 16, 2010. The stock dropped 25% in three weeks and then chopped sideways and lower.

Acme Packet (APKT), a tech stock, completed tracks March 4, 2011. The stock fell 18%, rebounded 10% above the tracks, and then fell 83% below the tracks by July 2012. In April of this year, Oracle completed its acquisition of Acme Packet.

While the degree of bad news varied for these railroad tracks, the few that enjoyed a final spurt didn't enjoy it for long.