Certain analysts and theorists look at patterns on charts and graphs and believe they tell a story as to what may lie ahead on the particular security or market they may be looking at. Many theories and methods are then derived that try and predict where the price of the asset may go to next. The various theories are then usually named and some are widely followed and believed and some are not. This analysts takes the charting theories with a grain of salt but I do believe many at least have some sort of merit that I might find useful.
One chart theory I find useful is a pattern commonly known as a "climax" pattern. This pattern has two uses which are helpful to indicate potential bottoms and tops of price movements in stocks and indexes. Stocks refer to individual company stocks like an Apple, IBM or General Motors issues, all of which are individual companies, and indexes refer to the various markets like the Dow, the NASDAQ or any other investment vehicle that holds a multitude of stocks, bonds or other security. The point here is the climax pattern can apply to a individual security or a group of securities. Although there are no fool proof prognosticators of market direction, the climax pattern has two uses and they can be illustrated by their two names, a “climax bottom" and a "climax top".
The climax top is supposed to indicate when a stock may be topping out and about ready to change direction to the downside and the climax bottom is supposed to indicate (note the words "supposed to") when a security or index is bottoming out and ready to change direction to the upside.
The theory goes like this: suppose a stock or market has had a sustained rally upwards and an investor wants to know when to "get while the getting is good" and sell out before the stock falls back down. In other words, when might the rally be exhausting itself and the time is near to take some profits before a possible price fall takes it all back.
The climax part of the moniker says if the price action is mostly one direction but then exhibits wild swings with significant ups and downs of a high percentage compared to its usual degree of price swings, it might be indicating a climax pattern. An example of this would be a stock that climbs from 20 - 40 with daily highs and lows of a buck or two but generally grinds upwards until such a time where the stock swings wildly up and down 3 or 4 bucks but generally goes nowhere over time. The summary of this price action is the stock is experiencing wider than normal highs and lows over a short period of time and is generally stalling out while bouncing wildly. The same would hold true in either direction. If the extended price action had been up, and it starts bouncing wildly it would be a climax top. If the direction had been an extended erosion in price (falling prices over time) its price would stop falling and start bouncing wildly. This price action might be viewed as a possible climax bottom, indicating the fall might be coming to an end.
We don't have to look far for an example of a possible climax event. On February 9th of this year, the Dow had experienced several days of heart-stopping actions falling from a high of 26,616 weeks early and culminated the week with a 1300 point decline. That Friday the Dow had been down over 500 points early on with a intraday high up 500 points and closing with a 300 point gain. These wild intraday swings of nearly 1000 points in total give an excellent of example of what climax believers look for. The Dow may have substantiated the climax theory in the following days as the direction the next week was mostly in the upwards directions. Was the wild Friday a climax bottom? It certainly appeared so in hindsight.
Keep in mind no one can predict market direction with 100% certainty but depending on what theories an analyst might give weight to could at least give some indication at least to that particular analyst to invest accordingly.
The slew of chart theories are almost endless and its up to each investor to determine whether a particular method works for him or her. The climax theory of price action is just one of many. Keep in mind it is not possible to invest in an index directly and that this is not a solicitation to buy or sell any security.
Past performance is no guarantee of future results. All investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. This is not a solicitation nor recommendation to buy or sell any securities. Investing involves risk and you can lose money. Consult a qualified financial advisor before making any decisions and do your own research before investing. This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603 (530) 559-1214. SMC and Cambridge are not affiliated. His website is www.moneymanagementradio.com. California Insurance License # OL34249..