Page 388 - How to Make Money in Stocks Trilogy

When to Sell and Take Your Worthwhile Profits 263

Climax Tops
Many leading stocks top in an explosive fashion. They make climax runs—
suddenly advancing at a much faster rate for one or two weeks after an
advance of many months. In addition, they often end in exhaustion gaps—
when a stock’s price opens up on a gap from the prior day’s close, on heavy vol-
ume. These and related bull market climax signals are discussed in detail here.

1. Largest daily price run-up. If a stock’s price is extended—that is, if
it’s had a significant run-up for many months from its buy point off a
sound and proper base—and it closes for the day with a larger price
increase than on any previous up day since the beginning of the whole
move up, watch out! This usually occurs very close to a stock’s peak.

2. Heaviest daily volume. The ultimate top might occur on the heaviest
volume day since the beginning of the advance.
3. Exhaustion gap. If a stock that’s been advancing rapidly is greatly
extended from its original base many months ago (usually at least 18
weeks out of a first- or second-stage base and 12 weeks or more if it’s
out of a later-stage base) and then opens on a gap up in price from the
previous day’s close, the advance is near its peak. For example, a two-
point gap in a stock’s price after a long run-up would occur if it closed
at its high of $50 for the day, then opened the next morning at $52 and
held above $52 during the day. This is called an exhaustion gap.
4. Climax top activity. Sell if a stock’s advance gets so active that it has a
rapid price run-up for two or three weeks on a weekly chart, or for
seven of eight days in a row or eight of ten days on a daily chart. This is
called a climax top. The price spread from the stock’s low to its high for
the week will almost always be greater than that for any prior week
since the beginning of the original move many months ago.
In a few cases, around the top of a climax run, a stock may retrace
the prior week’s large price spread from the prior week’s low to its high
point and close the week up a little, with volume remaining very high.
I call this “railroad tracks” because on a weekly chart, you’ll see two
parallel vertical lines. This is a sign of continued heavy volume distrib-
ution without real additional price progress for the week.
5. Signs of distribution. After a long advance, heavy daily volume with-
out further upside price progress signals distribution. Sell your stock
before unsuspecting buyers are overwhelmed. Also know when savvy
investors are due to have a long-term capital gain.
6. Stock splits. Sell if a stock runs up 25% to 50% for one or two weeks
on a stock split. In a few rare cases, such as Qualcomm at the end of