In the last couple of issues you have pointed out stocks that you refer to as "topping". Can you please explain this and the criteria that you use to identify them? Should this be a signal to sell or not? (August 27, 2001)
Good question. Topping characteristics come in different forms. One is after a strong move higher when the stock has doubled or more, the stock starts to show high volatility in the form of larger intraday moves up and down than normal, the moves coming one in rapid succession: one up, one down, etc. Volume usually swings wildly as well. This is a topping sign after a stock has made a strong move.
On longer term moves you also watch for another sign: the high followed by a second attempt at a high that occurs on very low volume. That shows there are no buyers in on this subsequent try, and it could lead to a double top. After either of these scenarios, it is not a bad idea to take some money off of the table. Then you watch for the breach of the trendline it has been riding higher. That is a sign to exit.
Shorter term there are signals that a bounce off of a trendline or breakout is losing steam. The stock has made a nice move, but starts running out of gas. These signals include a high-volume reversal off of the session high and a close well off of the high. Often this is accompanied by a doji. If the stock gaps higher the next session and then starts to sell off after that, the stock is usually selling off short term. Another is a low volume assent that shows the same action in closing well off of the session high; lack of volume means the move had no punch, and it will eventually fall. Gaps higher followed by selling after a good run higher are called 'exhaustion gaps.' The last flood of buyers who 'have to get in' jump in and gap the price higher; the institutions are selling to the buyers as fast as they can. Volume shoots up. The stock then usually tanks.
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