How To Spot A Top In Stocks

Do you know when is the time to sell a stock? Wondering if your stock is topping or not? You must read this if you want to know. Many people know when to buy but they often do not know when to sell. Many people make a lot of money when they buy at the right time but they lost all their profits by selling at the wrong time. 

Perhaps they bought right in the middle of a sector uptrend. Perhaps they bought the stock when the indexes are breaking out. Now that they are sitting with a profit of $3 Million, they hope that their portfolio will go up to $10 Million. Before they know it, the market collapses and their $3 Million profit turns to $1 Million. Then they become frustrated and start to average down and before you know it, their portfolio is in the negative for the year.

In order to avoid this kind of situation, you need to know the signs of when a stock is topping out. Below are what we are going to discuss further:

  1. Stage 3 of the market or stock
  2. Breaking uptrendlines
  3. Double tops, triple top patterns, head and shoulder and reverse cup and handle patterns, rounded top (basically chart topping patterns)
  4. Reaching resistance areas in long term charts
  5. Pattern target
  6. Topping tails
  7. Bearish candlestick patterns
  8. Overbought indicators
  9. Divergences

Market Stages

Before you continue reading, I would like you to go and read the first article I have written in this Stock Market Course. It is titled The 4 Stages That Every Stock Goes Through. Once you have done that, come back to this article. It will set the foundation for your investing or trading career.

Basically there are 4 stages that each stock goes through:

  • Stage 1- Bottom
  • Stage 2 - Uptrend
  • Stage 3 - Market Top
  • Stage 4 - Downtrend

A stock will go through all these 4 stages at one time or another. After a prolonged period of uptrend a stock will start to top and make a Stage 3.

The characteristics of a stock making a Stage 3 market top is:

  • Wide and whippy movement

A stock that is in a nice uptrend will be moving gradually higher. But when it is about to make a top, there will be erratic price movement because the public will be chasing the stock. All too often, the stock will not be able to sustain a rise and closes lower dramatically forming topping tails or shooting stars. You might want to pay attention if your stock is behaving like this.

Breaking Uptrendlines

Breaking an uptrendline is one of the earliest signal to traders and investors that their stock may not be healthy anymore. While breaking an uptrendline is unhealthy, it does not mean the stock is doomed. It just tells us that the stock is not doing very well.

There are 2 things that will happen when a stock breaks its uptrendline. It will either move sideways for awhile and then resume higher or it will start to top and begin a new downtrend. No matter what, we want to be very careful if our stock starts to break an uptrendline.

Chart Patterns

Chart patterns that hint of a top work very well. Whether they appear in monthly, weekly, daily, hourly or even 5 min charts, they work very well to inform the observant trader or investor that the stock is about to top. Therefore you might want to study some of these topping patterns like double top, triple top, head and shoulders top and many others so that you are able to spot them when your stock makes the pattern.

Reaching Resistance Areas In Long Term Charts

Resistance areas especially weekly resistance and monthly resistance can really keep a stock from rising. Often times they will act as a strong resistance that makes the stock tumble and crash. So whenever you see a stock about to hit long term resistance be very careful to sell some of your shares.

You do not want to sit there and hope that the stock will recover and move higher. There is a reason why resistance works so well. People who have bought at the area in the past wants to sell their stocks to recoup their losses. The heavy selling will keep the stock from rising.

Pattern Targets

Did you know that chart patterns have target too? Chart patterns like the double bottom, triple bottom, ascending triangle patterns, reverse head and shoulders as well as the measured move pattern can give us a target to help us to be realistic. If the chart pattern target coincides with a resistance area, it is even more powerful. So take some time to read about chart patterns and their targets.

Topping Tails In Different Time Frames

A topping tail or shooting star is part of the bearish candlestick pattern that tells traders and investors that a stock or the market is topping. It is a bearish reversal candlestick pattern that has warned traders of impending crash time and time again. I think they deserve their own special mention here because of the immense accuracy this candlestick pattern has warned traders of the decline in their stock.

When you see a shooting star or topping tail in the daily or weekly or even monthly chart of your stock, please pay special attention. It may represent the last gasp of glory that this stock may have before collapsing. You will thank yourself later for avoiding the many losses that will fall on thousands of investors.

The topping tail can be very useful in all kinds of market. Even if you find the topping tail appear in a stock in Asia, you can use it to tell you or warn you that the stock is topping out.

Take a look at Kronologi Asia that is listed in the Malaysian stock market.

Notice how the stock had a nice run up in the stock price until it formed a topping tail. The topping tail coincided with a Stage 3 top which often happens after a nice run up in a stage 2 bull run.

The presence of the topping tail warned investors that the stock has topped out. It has run out of steam and the likely direction is down. Look at how much the stock fell after the appearance of the topping tail in the weekly chart of Kronologi.

Therefore, the next time you see a topping tail in the weekly chart of your stocks, be careful.

Bearish Candlestick Patterns

Candlestick analysis is perhaps the purest form of technical analysis because it analyzes the price of the stock or index. Indicators are derivatives of price and therefore why not look at price itself? You get it from the horse' mouth and not from other source. So, there is tremendous value in looking at bearish candlestick patterns. Do head over to the Japanese Candlestick Pattern page for more bearish candlestick patterns. You might also want to read the article I wrote titled The Best Candlestick Patterns Every Trader Should Know.

Overbought Indicators

Indicators are very useful to help us spot a top in stocks. They may not work always but when you see an overbought indicator you might want to study the stock carefully. Combining indicators with other technical analysis such as resistance and candlestick patterns may give you an early clue that the stock is about to topple.

Divergences

Divergences can often help us to spot a top in our stocks. A divergence occur when our stocks make a higher high or same highs but the stock's indicators such as the stochastics and MACD make lower highs. This tells us that the stock may have some internal weakness that we are not aware of on the surface.

Conclusion

Stocks do not top without giving us subtle clues. If you use charts to analyze stocks, you have a big edge over people who do not use charts. Learn the above signals and the next time you see a stock doing the above, take note and beware.

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