What to Look for When the Market Hits a Top

By: Leroy Rushing
Market tops are extremely profitable for short sellers. Tops are usually much more exaggerated than bottoms and last only for a short amount of time. This presents a small "window of opportunity" for investors to take notice.

Short Interest

Proven strategies are nothing compared to watching short interest. When the market is forming a top on a chart, the amount of short interest tells traders how many shares are sold short – essentially how many people think the stock price will drop. Watching short interest will improve your trading and help you meet your trading goals.

Technical Analysis

Technical analysis, such as RSI topping or divergence, can help predict weakness in the market. As tops come to an end, RSI charts usually make a double peak, the second lower than the first.

If the RSI and price are moving in different directions, the price is likely to fall. Technical analysis is best applied in each timeframe to gauge how big each movement will be.

Strategies for Gapping Down

A true top is made definite by a gap down, indicating that sellers are pushing the price down. Develop your own strategies for gapping down to profit heavily. Many traders use technical analysis, and then use a gap down to confirm. Gaps are the biggest indicator of sentiment; if a stock prices gaps down, it’s probably about to enter a down trend.

Look Back at Historical References

What happened the last time the stock topped? When it was $50 a share? Watching horizontal trendlines is a great way to improve your trading. If the stock dropped after reaching $50 a year ago, it probably will act similarly again. This should always be confirmed first by technical analysis or your own custom indicators. Either way, history is a great way to predict the future.

Investor Sentiment

Another great way to predict long term tops is to see how everyone else is reacting. When the media started showing stories of the great wealth achieved in real estate, the market failed just a few months later. Indeed, the media is one of the best indicators of a top. When it seems that everyone is involved in the upswing, the only logical response is that investors will flood out. This was true with the 1990 housing bubble and the tech bubble.

Investment
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