A blow-off top is a chart pattern that shows a steep and rapid increase in a security’s price and trading volume, followed by a steep and rapid drop in price—usually on significant or high volume as well. 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.
KEY TAKEAWAYS
- A blow-off top is a chart pattern showing a sudden rise in price and volume, followed by a sharp decline in price also with high volume.
- The rally into the blow-off could be based on news, or speculation of good news, growth, or higher prices in the future.
- Blow-off tops can occur in all markets, are volatile, and can be very hard to trade as an ill-timed trade in either direction can mean huge losses.
Understanding the Blow-Off Top
Blow-off tops occur in all markets and can impact stocks, futures, commodities, bonds, and currencies. A blow-off top indicates that a security’s price is about to fall. This does not mean the price will fall immediately though. The rising part of a blow-off can last weeks. The early part of this rise may look exceptional, with big daily and weekly price gains. Yet, sometimes, it still may continue to escalate for several more weeks.
It is hard to judge when exactly a blow-off top is in its reversal stage (and not just a pullback) until the price starts dropping. Even then, it sometimes isn't until four or five days after the decline starts that it can be called a blow-off top. This is because when a security is rising rapidly, the price may pull back for a few days but then continue rising.
A blow-off top has several key traits, yet it is only in hindsight that we know if it created an actual top in price. Sometimes the price will rise rapidly, then pause or pull back slightly, and then keep rising. Therefore, the blow-off top must be composed of a steep rise and steep fall to qualify.