Market at New Highs, but More Losers than Gainers-Are Your Stocks Topping Out?

“The best way to sell a stock is on the way up, while it’s still advancing and looking strong to everyone else… You’ll never sell at the exact top so don’t kick yourself if a stock still goes higher after you sell.” – William J. O’Neil, MarketSmith Founder

We hope that you have been enjoying a good ride as the market has made new highs. However, if you have been reading our Daily Big Picture, you would have observed that the market breadth has been tilted toward the losers, even as the indices have climbed higher.

If you are not aware of the term “market breadth” let me first explain that for you. The market breadth tells you the number of stocks that has advanced, declined, and remained unchanged on a stock exchange (we track the prices on the NSE) on a particular day. The market breadth is a useful indicator to watch out for, as it tells you whether an uptrend or a downtrend, as indicated by an index, is broad-based across stocks.

Generally, when the index is moving up, we want the market breadth to be in favor of the gainers, as it gives us conviction about the market rally. In recent times, though, even as the Nifty has scaled the 10,000 mark, the rally has been a bumpy one, with only a minority of the stocks advancing. This leads an investor to the question, whether the market or some particular stocks have topped out.

We, at MarketSmith India, believe in rules-based investing, and hence we are not going to predict the level where the market is heading to. However, in this article, we will look at a particular pattern called “climax top” that some stocks have made, which indicated that they were topping out.

Climax Top Pattern:

This pattern occurs usually after a stock has made a large price move for many months, and accelerates upward in a parabolic fashion. At its climax, the stock usually makes an exhaustion gap (a gap between the previous day’s highest price and the current day’s lowest price), and has the largest daily/weekly point gain since the first stage base, on high volume. This is followed by a stalling day/week (a day/week where the stock closes within the lower half of the trading range on high volume). Usually, this happens after the stock is:

• Up 25-50% in one to three weeks, or
• Up seven or eight days out of 10 days in a row
• Closes excessively (typically more than 100%) above 200-DMA

We will now look at some of the examples of this climax top pattern, and how the stock has played out after forming this pattern.

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