Investors and stock traders are always trying to isolate key tops and bottoms on stock charts. In this article, I will discuss the two most powerful stock chart top signals. In addition to the three most powerful stock chart top signals, I will give you accompanying signals that give even more credence to a major top on a stock or a market.
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The first is a topping tail. A topping tail is seen when a stock chart sees a surge to new 52 week highs. The move needs to be significant. Then, the stock reverses and sells, closing near the lows of the day. A candle should have a long tail on top with a close in the lower 25% of the days range. Note the example below.
The second classic stock chart top signal is an engulfing candle. This is in many ways more powerful than the topping tail and occurs in far fewer instances. The general rule is, the less often a signal appears, the more powerful the signal. To signal a stock chart top, an engulfing candle must form at a 52 week high on a chart. Price must open above the high of the previous day and must sell to close the day below the low of the previous day. In simple terms, it must engulf the previous days high and low. Note the example below.
Accompanying either of these two signals, it is important to see significant volume. Big volume means institutions are involved in the selling thus giving an additional level of credence to the stock chart top signals. A pro investor or stock trader will always be on the lookout for these signals. Topping tails (if formed correctly) play out 70% of the time, engulfing candles play out 80%.