Continued reading from Tape Reading & Market Tactics.
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Chapter 7
Various Types of Top Action
Tops More Difficult to Distinguish Than Bottoms
Top-signals of the market as a whole, or of the market averages, are not as readily discernible as bottom-signals. The reason for the difference in action is that, in making for a top, all stocks do not reach their pinnacles at the same time, because, broadly speaking, buying is always, in any market, more slowly actuated than selling; whereas, in making for a bottom, stocks gain momentum as prices decline, and the rank and file, becoming panicky, dump stocks without rhyme or reason, and thus bring on a climax.
We have many rounding-over tops of the general market, as differentiated from sharply defined bottoms. The best illustration of this is the broad two to three months’ top in the fall of 1929, as contrasted with the bottoms in the single days of October 29 and November 13, 1929.
In detecting the tops of moves, therefore, we must watch our individual stocks and not depend upon the general market for the signal to sell. However, when we notice that the market as a whole, as reflected in stock averages, slows up—becomes tired, and is apparently struggling to make higher peaks—we then are safe in assuming that the demand is not sufficient to push stocks farther without an intervening reaction. That is the time to analyze with particular concentration the action of individual stocks, because volume as a signal of the composite market is often deceiving, inasmuch as the top may consume several days and, therefore, each day will not be marked by conspicuous volume.
These tired-appearing markets must be carefully analyzed, as I have said, because in straightaway bull markets this action sometimes becomes nothing more than a rest-period (see page 92-93 and Plates 15 and 16), after which the advance is resumed. You will notice, however, from the following examples, that when tops are formed we do get the signal from volume—either at the top, followed by an immediate “turn-over” on greatly increased volume, or with a slowly “falling-over” top followed by the momentous volume a day or more later. Thus it may be broadly stated, that markedly increased volume following a run-up in price signifies distribution.
A Sharply Defined Top
In Plate 3 is shown the July, 1930, top in American and Foreign Power. It hardly needs explanation. The three-day spurt to the top was followed by a sudden turn-over on the 30th from a high of 77 to a closing price of 73, attended by heavy volume. You will notice in this illustration that the high figure of the top day exceeded that of the day previous by only $0.25 per share; yet the volume at this last drive was larger. (The curve in the chart, by the way, is formed by the high prices of each day.) The period covered is from July 14 to August 10, 1930.
This is a clear illustration of how a stock oftentimes rushes up accompanied by heavy volume and turns over on a big volume day.
A Broad Top
The action of General Electric (Plate 4) at this time in July was not so simple to interpret. There was no clear-cut indication of which was the top-day, as there was in American and Foreign Power.
From an analysis of a full day’s activity, you will see it was not until the 30th that we received a definite message that the supply exceeded the demand and that a top had been formed.