When it comes to breakout stocks, knowing when to get out is as important as knowing when to buy. When a stock has a climax run, it can be an important sign to take profits.
In the midst of a stock's climax run, the tempo suddenly speeds up, much like the climax of a movie. The action reaches a fever pitch of intensity, before finally peaking and reverting to a resolution. This final advance tends to occur after a long move up. It's the high point at the very end of the stock's move. A climax run may also occur as the surrounding bull market enters its final stages.
The stock's run may look nearly vertical and it may feel counterintuitive to bow out when it's really starting to skyrocket. But this is when the time has come to curb your emotions of greed or glee. It's time to take your gains and calmly exit the stock.
But just because a stock is rapidly moving higher doesn't mean it's for sure a climax top. Over the years, IBD has compiled research-driven, time-proven objective guidelines on how to spot a true climax run on a stock chart.
How To Invest: Climax Run Criteria
Once the stock has been showing a strong uptrend for a long enough period of time, you could start looking for climactic action.
The first key characteristic of a climax run is that it generally occurs at least 18 weeks after a breakout from a first- or second-stage base. Be sure not to call them too early in the rally. Make sure you're counting bases as well. When a stock has moved out of a late-stage base, the climax run may happen sooner than later.
Other clear markings of a climax run include a rapid price run-up for two or three weeks, with usually a 25%-50% gain during that period. Also, on a daily chart, look for something like seven up days in eight sessions, or eight up days over 10 sessions.
How To Invest? Know The Characteristics Of Climax Run
In addition, you may see a wide trading range within the stock. You'll want to check how extended the stock is from the 200-day moving average as well. If it's 70% to 100% above it, that makes the stock more ripe for a climax top. Other indicators include seeing an upward break of a channel line that touches the highs of the stock that spans its advance over many weeks.
Railroad tracks are another key indicator to look out for, although it is quite rare.
This type of price action occurs over a two-week period. Sometimes near a top, a stock will retrace the prior week's large price spread and close the week slightly higher or mostly unchanged from the prior week. Volume is heavy, and yet the stock fails to make much price progress.
On a weekly chart, it looks like two parallel vertical lines resembling railroad tracks.
Tesla's Climax Top
In early 2021, Tesla gave signs of a climax top that occurred right before the stock began a long slump. In an IBD article on Jan. 8 of that year, we noted how the stock checked a lot of the boxes for a climax top. Shares had broken out of an early-stage base less than two months prior, but had gone up more than 10-fold from an initial breakout two years earlier.
- Tesla had jumped 32% in the previous three weeks and 43% in the past five.
- The stock climbed about 64 points on Jan. 8, 2021 (1), its biggest one-day gain of its run. When a stock has its biggest one-day point gain after an extended run, it could be a warning of a top.
- Tesla stock had gone up 11 days in a row (2). When a stock goes straight up for seven or eight days in a row, or eight out of 10 days, it may also signal a pullback is imminent.
- The stock had gapped up three days in the past several sessions in what could be described as exhaustion gaps, a sort of final burst of buying after a long run.
From a high on Jan. 29, 2021 (3), Tesla began a long consolidation from which it did not make new highs until October 2021.
