Navigating Price Mountains by Thomas Bulkowski
See You At The Top
When stock prices start climbing or forming a price mountain, it’s tempting to want to get in on the action. But should you buy a stock that’s forming a mountain?
Let me tell you a fictitious story about Basketcase Bob. On August 28, 2000, he bought stock in Intel (INTC) and received a fill at $75.81, the very high for the day, the year, and for the history of the stock. I show his theoretical purchase in Figure 1 (point A). At that time, the stock market was soaring, especially semiconductor stocks, and he wanted a part of the action.
When he checked the stock on October 11, 2000 about six weeks later (point B), the stock had bottomed at $35. “It’s down too far now. As soon as I get my money back, I’m selling,” he said to himself. Perhaps you have uttered similar words in similar circumstances. If others buy near the same price, and sell as soon as they get their money back, their collective behavior forms a chart pattern called a double top. That is two peaks near the same price with a decline afterward.
Let’s return to Basketcase Bob. Question 1: How long will it be, on average, before he gets his money back? I’ll answer that in a moment. Until then, consider another trade at point D on the chart in Figure 1.