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William J O’Neil was a famous growth investor known for his rules-based investing process called CAN SLIM. Over O’Neils long and illustrious career, he made a fortune investing in the hottest, most innovative growth stocks of the day, and more importantly, selling them near the top. Over his multi-decade career, O’Neil made millions in novel ideas and companies such as Price Company (which later became Costco ((COST - Free Report) )), online marketplace Ebay ((EBAY - Free Report) ), EV-pioneer Tesla ((TSLA - Free Report) ).
It’s About What You Keep
Once a growth investor takes time-tested principles like growing earnings, a bullish chart pattern, and a growing industry into account, making money in the market becomes not only possible, but repeatable. However, buying winning stocks is not the issue for the majority of investors. After all, a baby can pick Scrabble letters out of a bag and potentially find a winner.
The hard part of investing is selling stocks; especially those that are moving in your favor rapidly. O’Neil was genius at doing this: He rode internet-related stocks like Qualcomm ((QCOM - Free Report) ) higher for months before selling them near the absolute top. How was O’Neil able to pull off such a feat? By studying hundreds of winning stocks and their topping patterns.
“The pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.” ~ Jesse Livermore
The Climax Top
Though O’Neil had several sell signals, today we are going to focus on a sell signal that is relevant to today’s environment. Below is a blurb from O’Neil himself on Climax Tops:
“Many leading stocks top in an explosive fashion. They make climax runs – suddenly advancing at a much faster rate for one or two weeks after an advance of many months. In addition, they often end in exhaustion gaps – when a stock’s price opens up on a gap from the prior day’s close, on heavy volume.”
Key Rules of the Climax Top
1. Largest daily price run-up: A cautionary sign occurs when a stock that has rallied for months experiences its largest point increase in the move.
2. Heaviest daily volume: Extreme volume is a signal that trapped shorts have capitulated, while amateur longs chased the extended stock.
3. Exhaustion gap: If a stock gaps up (trades higher in after-hours trading) multiple times, the advance is on its last leg.
4. Climax top activity: “Sell if a stock’s advance gets so active that it has a rapid price run-up for two or three weeks on a weekly chart, or for seven of eight days in a row or eight of ten days on a daily chart.”
1999 QCOM Case Study
In 1999, no hotter stock existed than semi-conductor maker Qualcomm.As the internet craze went into a frenzy, QCOM ran from ~$6 to $200 in a year! Sure enough, the move came to an end in a classic climax top:
1. Largest point spread: On December 29, 1999 QCOM gained $39 points in a single session, marking its largest point spread to that point.
2. Heaviest daily volume: Though QCOM didn’t trade its highest volume ever, volume on 12/29 soared 142% versus the 50-day average and was the heaviest volume in weeks.
3. Exhaustion gap: After running for months, QCOM gapped up in price from an extended move. ***(It’s important to decipher a gap up from a base (healthy) from a gap up from an extended move (exhaustion))***
4. Climax top activity: From 12/13/1999 to 12/21/999 QCOM shares gained ground for seven straight sessions – a red flag.
Below is the 1999 QCOM example marked up. A good exercise is to look at each data point and match them up to the chart and the commentary.
Image Source: TradingView
After topping in January 2000, QCOM shares would not see their climax top highs for another twenty years!
Super Micro Computer ((SMCI - Free Report) ):Shades of QCOM in 99’?
Like QCOM in 1999, SMCI is a clear leader in today’s market. Over the past fiver years SMCI is up nearly 5,000%. Year-to-date (keep in mind we are in February), the bull trend has accelerated, and shares are up a mind-blowing 250%! Instead of the internet, the new frenzy on Wall Street is AI.
After such a breathtaking move, its worth looking at SMCI as a potential Climax Top situation. The stock gapped higher for a second straight day from an extended move, saw its highest trading volume in history (25 million shares, 244% above average), saw its largest one-day point spread ($123), and has gained ground for nine straight sessions (climactic activity)
To give you an idea of SMCI’s strength, the stock opened 2024 at ~$275, and today, gained $123 points for the day!
Image Source: TradingView
Bottom Line
The stock market is notoriously hard to predict, especially calling tops. However, SMCI has all the ingredients to a classic Climax Top pattern.
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SMCI: Shades of QCOM in 99'?
Who was William O’Neil?
William J O’Neil was a famous growth investor known for his rules-based investing process called CAN SLIM. Over O’Neils long and illustrious career, he made a fortune investing in the hottest, most innovative growth stocks of the day, and more importantly, selling them near the top. Over his multi-decade career, O’Neil made millions in novel ideas and companies such as Price Company (which later became Costco ((COST - Free Report) )), online marketplace Ebay ((EBAY - Free Report) ), EV-pioneer Tesla ((TSLA - Free Report) ).
It’s About What You Keep
Once a growth investor takes time-tested principles like growing earnings, a bullish chart pattern, and a growing industry into account, making money in the market becomes not only possible, but repeatable. However, buying winning stocks is not the issue for the majority of investors. After all, a baby can pick Scrabble letters out of a bag and potentially find a winner.
The hard part of investing is selling stocks; especially those that are moving in your favor rapidly. O’Neil was genius at doing this: He rode internet-related stocks like Qualcomm ((QCOM - Free Report) ) higher for months before selling them near the absolute top. How was O’Neil able to pull off such a feat? By studying hundreds of winning stocks and their topping patterns.
“The pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.” ~ Jesse Livermore
The Climax Top
Though O’Neil had several sell signals, today we are going to focus on a sell signal that is relevant to today’s environment. Below is a blurb from O’Neil himself on Climax Tops:
“Many leading stocks top in an explosive fashion. They make climax runs – suddenly advancing at a much faster rate for one or two weeks after an advance of many months. In addition, they often end in exhaustion gaps – when a stock’s price opens up on a gap from the prior day’s close, on heavy volume.”
Key Rules of the Climax Top
1. Largest daily price run-up: A cautionary sign occurs when a stock that has rallied for months experiences its largest point increase in the move.
2. Heaviest daily volume: Extreme volume is a signal that trapped shorts have capitulated, while amateur longs chased the extended stock.
3. Exhaustion gap: If a stock gaps up (trades higher in after-hours trading) multiple times, the advance is on its last leg.
4. Climax top activity: “Sell if a stock’s advance gets so active that it has a rapid price run-up for two or three weeks on a weekly chart, or for seven of eight days in a row or eight of ten days on a daily chart.”
1999 QCOM Case Study
In 1999, no hotter stock existed than semi-conductor maker Qualcomm.As the internet craze went into a frenzy, QCOM ran from ~$6 to $200 in a year! Sure enough, the move came to an end in a classic climax top:
1. Largest point spread: On December 29, 1999 QCOM gained $39 points in a single session, marking its largest point spread to that point.
2. Heaviest daily volume: Though QCOM didn’t trade its highest volume ever, volume on 12/29 soared 142% versus the 50-day average and was the heaviest volume in weeks.
3. Exhaustion gap: After running for months, QCOM gapped up in price from an extended move. ***(It’s important to decipher a gap up from a base (healthy) from a gap up from an extended move (exhaustion))***
4. Climax top activity: From 12/13/1999 to 12/21/999 QCOM shares gained ground for seven straight sessions – a red flag.
Below is the 1999 QCOM example marked up. A good exercise is to look at each data point and match them up to the chart and the commentary.
Image Source: TradingView
After topping in January 2000, QCOM shares would not see their climax top highs for another twenty years!
Super Micro Computer ((SMCI - Free Report) ): Shades of QCOM in 99’?
Like QCOM in 1999, SMCI is a clear leader in today’s market. Over the past fiver years SMCI is up nearly 5,000%. Year-to-date (keep in mind we are in February), the bull trend has accelerated, and shares are up a mind-blowing 250%! Instead of the internet, the new frenzy on Wall Street is AI.
After such a breathtaking move, its worth looking at SMCI as a potential Climax Top situation. The stock gapped higher for a second straight day from an extended move, saw its highest trading volume in history (25 million shares, 244% above average), saw its largest one-day point spread ($123), and has gained ground for nine straight sessions (climactic activity)
To give you an idea of SMCI’s strength, the stock opened 2024 at ~$275, and today, gained $123 points for the day!
Image Source: TradingView
Bottom Line
The stock market is notoriously hard to predict, especially calling tops. However, SMCI has all the ingredients to a classic Climax Top pattern.