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jcsok wrote:I'm waiting for a blow off top.

Most respondents said the added caution is due to a possible blowoff top in global equity markets.

Blow-Off Top Reviewed by Cory Mitchell Updated Sep 5, 2019


What Is a Blow-Off Top?

A blow-off top is a chart pattern that shows a steep and rapid
increase in a security’s price and trading volume followed by a
steep and rapid drop in price usually on significant or high volume as
well. The rapid changes indicated by a blow-off top, also called a
blow-off move or exhaustion move, can be the result of actual news or
pure speculation.

Blow-off tops occur in all markets, such as stocks, futures,
commodities, bonds, and currencies.


Key Takeaways

* A blow-off top is a steep rise in price and volume, followed by a
sharp decline in price, also typically on high volume.

* The rally into the blow-off could be based on news, or speculation
of good news, growth, or higher prices in the future.

* Blow-off tops can occur in all markets, are volatile, and can be
very hard to trade as an ill-timed trade in either direction can
mean huge losses.


Understanding the Blow-Off Top

A blow-off top indicates that a security’s price is about to fall, and
if it is a blow-off top, then the price must fall for it to qualify as
a blow-off top. This does not mean the price will fall immediately
though. The rising part of a blow-off can last weeks. The early part
of this rise may look exceptional, with big daily and weekly price
gains. Yet, sometimes, it still may continue to escalate for several
more weeks.

It is hard to judge when exactly a blow-off top is in its reversal
stage (and not just a pullback) until the price starts dropping.
Even then, it sometimes isn't until four or five days after the
decline starts that it can be called a blow-off top. This is because
when a security is rising rapidly, the price may pull back for a few
days but then continue rising.

A blow-off top has several key traits, yet it is only in hindsight
that we know if it created an actual top in price. Sometimes the price
will rise rapidly, then pause or pull back slightly, and then keep
rising. Therefore, the blow-off top must be composed of a steep rise
and steep fall to qualify.

Blow-off top patterns are common in securities where there is a lot of
speculative interest. Prices rise, usually on positive news or on the
prospect of good future news, such as future growth or the release of
a positive drug trial, for example. As the price rises, more and more
people get excited. More people also start to feel they are missing
out, and they don't want to miss out anymore, so they buy. The higher
the price goes, the number of people lured in to buy increases, and
thus the higher the price and volume go.

Blow-off tops are often exceptionally volatile. Near the end, when the
reversal is occurring, slippage on orders is far more likely as the
price is moving so fast. Once the price starts to drop it can be very
difficult to get out anywhere close to the top, because once the price
starts to fall everyone rushes for the exits, selling, all at once.
After the massive rise, and so many people buying, there is no one
left to buy, but there are lots of people (who already bought) who are
panicking to sell, locking in profits or trying to limit losses.


Identifying Blow-Off Tops

Early on, blow-off tops may appear similar to strong rallies. A strong
rally may rise at a 45-degree angle, but in a blow-off situation, the
angle of ascent is almost vertical.

Some common characteristics of blow-off tops include:

* Limited Pullbacks: Blow-off tops are massive—near vertical—rallies
with no substantial pullbacks. This differentiates them from
securities that are simply in a strong uptrend. If pullbacks do
occur, they are typically only one to three days and then price
rallies again.

* Massive Price Increases: These types of tops don't come after
mediocre rises. The price may rise a few hundred or even a few
thousand percent, with the biggest dollar (not necessarily
percentage) gains in the stock price coming in the last week or
few days of the move.

* Bearish Volume: Blow-off tops are followed by sharp moves lower on
massive volume, which indicates that long traders are exiting
the stock in droves.

* Broader Market: Blow-off tops are often exacerbated by wider
market conditions, which means that a broad market sell-off could
lead to a move lower.

If traders have misidentified a blow-off top, or traded it wrong, it’s
often best to exit the position early on to avoid becoming a bag
holder. Going short too early in a blow-off can mean extremely large
losses if the loss isn't cut quickly. Similarly, going long too late
in a blow-off top scenario can mean huge losses when the price starts
dropping and doesn't go back to prior levels.

Those who successfully identify blow-off tops have a unique
opportunity to capitalize on the overreaction of other traders.


Example Of a Blow-off Top in Bitcoin

In 2017, Bitcoin was seeing a steady price rise. Early in the
year, it traded briefly above $1,000 and briefly below $800, but then
started to creep higher out of that range. By mid-year, it was
approaching $3,000. By September it tested $5,000, and by October
it tested $6,000. At this point, the blow-off hadn't even started,
even though the price was already higher by several hundred percent.

In December alone, the price went from $10,000 to nearly $20,000. This
was by far the biggest dollar gain in the price.

blow-off top example in Bitcoin TradingView

During the main part of the blow-off in December, the longest pullback
was three days before the price started rising again. Once the price
started to reverse, it dropped for six days straight.

Volume started picking up in November but increased more in December.

The selling started out slowly, which doesn't always happen. The price
started dropping on relatively low volume, but as the price kept
dropping (few buyers left to support the price), there is a massive
selling volume spike on the sixth day of the decline as a whole bunch
of buyers get flushed out on a massive intraday drop where the price
moves more than $500.