Trade Alert: Get More Defensive Into What’s Likely Blow-Off Top Action

Ever heard the term “blow-off top” in regards to the market?

Investopedia defines it as: 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.

When I look at Tesla’s chart I get a bit worried that we’re in the midst of a blow-off top.

Then I look at NVDA’s chart and I get even more worried that we’re in the midst of a blow-off top.

Then I look at SMH’s chart and I’m like, yup, if an ETF, a collection of stocks, is acting like this, we’re probably in the midst of a blow-off top.

Not all blow-off tops are the same and to be sure, I’m not sure that this is a blow-off top. But here are some recent historical examples of what can happen to stocks after a blow-off top.

Clearly, Tesla and Nvidia have much better fundamentals than Zillow or Peloton and there’s little reason to think that TSLA or NVDA or SMH specifically will drop 70% from these levels. But there are plenty of other stocks out there right now that are probably in a blow-off top phase that will end up with them being down 70% from these current levels. I implore you to go through your portfolios right now and consider getting out of one or two names that have gone vertical but that probably are way too speculative to justify the moves. I’d also suggest trimming some NVDA and other names in your portfolio if you haven’t yet. I’m doing some additional hedging and decreasing my net long exposure in the hedge fund today. I’m going to trim a little bit of ABNB, QCOM, NVDA, GOOG and maybe a couple other names in my personal account today too.

I think we’ll look back in a month or two and realize that this current moment was a better moment to trim/sell/short than to buy into the blow-off toppy action.

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