Blow-Off Top

DEFINITION of 'Blow-Off Top'

A chart pattern that indicates a steep and rapid increase in a security’s price and trading volume followed by a steep and rapid drop in price and volume. 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 Top

BREAKING DOWN 'Blow-Off Top'

A blow-off top usually indicates that a security’s price is about to fall, while a blow-off bottom suggests that a security’s price is about to rise. A security also can enter a blow-off period during which its value remains inflated for weeks or months. Often times, momentum stocks experience blow-off periods during their violent upswings and downswings.

For example, a common blow-off top pattern occurs when pharmaceutical companies announce the results of pivotal clinical trials. A failure to meet clinical outcomes tends to be a disaster for early-stage biotech or pharmaceutical companies, but optimism leading up to the FDA’s announcement date can lead to a price spike. Another example may be the initial public offering of a tech startup that has been hyped prior to the IPO date.

Traders who want to profit from blow-off periods and limit their potential losses can use trailing stop techniques, while blow-off tops can also be helpful for identifying potential gap-n-go trades. The key to success when trading blow-off tops is properly identifying them and ensuring that they aren’t simply prolonged uptrends – especially if traders are looking to make a contrarian trade and benefit from the decline from top-heavy levels.

Identifying Blow-Off Tops

Traders may experience difficulty when identifying blow-off tops. Early on, they may appear similar to strong rallies where it can be difficult to initiate a short position to call a reversal, as well as potentially too late to buy into a long position if the stock has already risen sharply.

Some common characteristics of blow-off tops include:

  • No Pullbacks: Blow-off tops have experienced massive uptrends with no substantial pullbacks, which differentiates it from stocks that are simply in a long uptrend.
  • 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. Those who successfully identify blow-off tops have a unique opportunity to capitalize on the overreaction of other traders.

The Bottom Line

A blow off top is a chart pattern that indicates a steep and rapid increase in a security’s price and trading volume followed by a steep and rapid drop in price and volume. These chart patterns are most commonly seen in momentum stocks that experience sharp moves and tend to be driven by rumors and news.