Toppy

What Is Toppy?

Toppy is a financial shoptalk term used to describe markets that are reaching unsustainable highs. The term toppy might be used to describe a stock, sector, or broad market index, like the Standard and Poor's 500 Index (S&P 500), that has had extended gains, yet there is analyst sentiment or a general market consensus that a potential reversal is imminent. A reversal is anytime the trend direction of a stock or other type of asset changes.

How Toppy Works

A toppy stock market moves to new highs and afterward retraces. Retracements are temporary price reversals that take place inside a larger trend. Investors refer to a retracement as a pullback, a dip, or a correction, on account of a 10% decline.

Just because a market is toppy doesn't mean it will remain there for a particular length of time.

Identifying a Toppy Market

Chart Patterns

Technical traders can use chart patterns, for example, a double top or a head and shoulders top, to identify toppy price action.

For example, in the chart below, TD Ameritrade Holding Corp. formed a swing high in early March 2018 and another swing high in early June 2018, giving the stock a double top before prices entered a correction phase.

Topping chart patterns that form over several months are typically more reliable than toppy price action patterns over shorter periods.

Example of a Double Top

Reversal Candlestick Patterns

Traders have been utilizing Japanese candlestick patterns to spot toppy price action dating back to the 16th century. Popular candlestick reversals include the bearish engulfing pattern, the piercing line pattern, and the hanging man pattern. These candlestick patterns happen near the closing stages of an uptrend and show a physiological change in investor sentiment.

Bearish Divergences

Toppy price action often accompanies a bearish divergence between the price of a security and a generally used technical indicator, for example, the relative strength index (RSI) or the stochastic oscillator.

For instance, a bearish divergence happens when the price of a security makes a higher high, however the indicator makes a lower high. Numerous traders use a combination of chart patterns, Japanese reversal candlesticks, and bearish divergences to help locate a toppy stock or market index.

Fundamentals

Investors likewise analyze a stock's fundamentals to determine on the off chance that the issue is toppy compared to its peers or sector.

The working capital ratio, quick ratio, price-earnings ratio (P/E ratio), and debt-to-equity ratio are just a few of the numerous metrics available to analysts and investors to assess the financial health and performance of a security.

Strategies for a Toppy Market

Go to Cash

While returns for cash (counting money market funds) are very low, if the market is in danger you might need to sit on your cash for a bit. What you save currently can be invested later at a lower price.

Try not to Buy on the Dip

Buying on the dip means purchasing a asset after it has dropped in price. The reason for doing this is an assumption that the new, lower price is a bargain deal because the drop in price is temporary; given a certain amount of time, the asset will increase in value in the future.

While buying on the dip can be a decent strategy in a bull market, buying overvalued technology stocks on their way down can be incredibly dangerous. There is a reason that their price is dipping and it remains to be seen what happens next.

Talk With Your Broker

Your broker can help you review your portfolio and help you determine how protected your portfolio is in the event of a toppy market. In the event that you own a critical number of overvalued stocks, it very well may be an appropriate time to take some gains.

Use Stop Losses

To ensure that you are securing in profits, set up stop losses (even assuming they are mental). You could likewise write down a buy price, the potential sell price, and a price to get out (on the off chance that you are off-base).

Highlights

• A toppy stock market moves to new highs and afterward retraces.
• Toppy is a financial shoptalk term used to describe markets that are reaching unsustainable highs.
• Investors might analyze a stock's fundamentals when they are attempting to decide in the event that the issue is toppy.
• There are a few tools used by trade analysts to identify a toppy market, including a reverse candlestick pattern.