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The major indexes finally had a down week – breaking their five-week winning streak.
If you’ve been following this newsletter, you know I think this is a good thing.
It’s still too early to say whether this is the pullback we’ve been waiting for.
So to start the week, let’s look at a chart that teaches us how to spot the top.
Chart of the Day
Take a look at this chart of Super Micro Computer (SMCI) – the hottest stock in the red-hot semiconductor space.
Up over 300% since November, SMCI has made far bigger moves than even names like Nvidia, Broadcom, and Advanced Micro Devices.
But this move is likely over – with its price action telling me it’s reached what is called a “climactic top”.
Here’s how you can spot a climactic top – something that will save you (and make you) a lot of money.
First you want to see a classic breakout pattern. If you look at the SMCI chart above, you can see it consolidating below the white horizontal resistance line before taking off like a rocket.
You want to get in during the consolidation period – a dream trade.
But for it to be a true dream trade, you have to know when to sell. One huge signal that tells me a climatic top has been reached is consecutive exhaustion gaps followed by a negative day.
An exhaustion gap is when the stock opens above the high of the previous day and closes the session above the previous day’s high. This leaves a “gap” between the two candles.
Such gaps actually signal strong bullish momentum. But when it’s followed by a large negative day (SMCI closed down a staggering 20% on Friday) – it tells me all positive momentum has been exhausted and that it’s time to exit the trade.
So, hopefully you found this helpful.
Now, does this mean the market as a whole has reached a climactic top?
Not at all. I explain what you should look for instead in the Insight of the Day.
Insight of the Day
The next bull run will likely be led by a different group of stocks.
Semiconductors have been one of the top-performing groups in the market. Additionally, several of the semis are big, mega-cap stocks. This means they account for an oversized weight in the major indexes.
These stocks have pushed the major indexes higher.
But beneath the surface, things are cooling. We are still seeing divergence in market breadth – with the percentage of stocks above their respective 200-day moving average declining slightly over the last two weeks while the market has rallied.
In other words, a small group of stocks is leading the rally.
If the semiconductor group pulls back or stalls like I expect, we want to watch how this ratio develops.
The ideal situation would be to see market breadth begin to rise as the index goes flat or pulls back slightly. This would set up the next bull run which will likely be led by a different group.
Biotech, crypto, and digital payment companies are all showing strength.
I wouldn’t be surprised if we see multiple triple-digit runs like SMCI’s 300% surge to the top from these companies – especially since they tend to be much smaller stocks.
And just like SMCI, the ideal time to get in is when these stocks are consolidating – before they take off like a rocket ship.
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