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 climax top. It is one of the surest sell signals, if you spot it correctly. Take advantage of this price pattern 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 breakout 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 for $16.50 in January 2013.
Multiple stock splits preceded the top, as often happens with climax tops.
Precision Castparts Corp announced that it has completed its acquisition of Titanium Metals Corp (Timet). Timet has been a subsidiary of ELIT Acquisition Sub Corp. (Acquisition Sub), a wholly-owned subsidiary of PCC, since December 21, 2012. Acquisition Sub, as the owner of more than 90% of the outstanding shares of Timet common stock, completed a short-form merger with Timet on January 7, 2013, as a result of which Timet became a wholly-owned subsidiary of PCC. Each remaining share of Timet common stock not tendered in PCC's previous tender offer for Timet shares (other than shares as to which holders properly exercise appraisal rights) was converted in the merger into the right to receive $16.50 without interest and less any applicable withholding of taxes. As a result of the merger, Timet common stock will cease to be traded on the New York Stock Exchange.