There’s an old saying among traders: “Stocks take the stairs up and the elevator down.”
In other words, stocks can take a long time to book serious gains … while overextended charts tend to crash hard and fast.
This is one of the many reasons I love trading put options — they can deliver some of the fastest profits in the market.
But, of course, timing is everything…
So, how do you know when a stock is about to tank? The answer lies in identifying blow-off tops…
A blow-off top is a sudden, dramatic increase in the price of a stock, followed by a sharp decline.
These tops are a huge, flashing signal that the chart is overextended (and a crash is imminent).
If you can learn to spot blow-off tops, you can position yourself to potentially make killer trades by buying puts on the underlying stock.
Don’t believe me? Look at a few massive put winners we’ve recently crushed in the Burn Notice Alliance…
Alcoa Corp (NYSE: AA)
May 30: Entered AA 6/7/24 $45 Puts at $1.34
May 31: Exited AA 6/7/24 $45 Puts at $1.97
+47.01% in 24 hours*
Gap Inc. (NYSE: GPS)
June 3: Entered GPS 6/7/24 $30 Puts at $1.12
June 4: Exited GPS 6/7/24 $30 Puts at $1.75
+56.25% in 24 hours*
Norwegian Cruise Line Holdings Ltd. (NYSE: NCLH)
June 5: Entered NCLH 6/14/24 $18 Puts at $0.29
June 6: Exited NCLH 6/14/24 $18 Puts at $0.40
+37.93% in 24 hours*
Palantir Technologies Inc. (NYSE: PLTR)
June 6: Entered PLTR 6/14/24 $23.50 Puts at $0.52
June 7: Exited PLTR 6/14/24 $23.50 Puts at $0.74
+42.31% in 24 hours*
Over 25 years of put trading, I’ve discovered three key indicators to help you identify a blow-off top before the chart crashes and burns.
Today, I’ll show you how to spot these signals (and explain how one led to me entering a brand-new put trade yesterday)…
3 Telltale Signs of a Blow-Off Top
Here are the three unmistakable signs of a blow-off top that every savvy trader should watch for…
Signal #1: Explosive Price Action
Blow-off tops all start the same way — with face-ripping price action. These moves usually look unassuming at first, bubbling up on modest volume…
A few days later, the share price will be several multiples higher, leaving unobservant traders to wonder how they missed the surge.
So, if you’re seeing a stock that’s surging 30% or more in just a few weeks … don’t ignore it. That’s a red flag for a blow-off top.
Inexperienced newbies will look at this soaring price action and try to chase the upside.
But I want you to take the expert approach and view these moments as put-buying opportunities.
That said, you need further confirmation to diagnose a blow-off top…
Signal #2: Above-Average Trading Volume
Don’t be fooled by a big share price move alone.
To confirm a blow-off top, you want to see a massive increase in trading volume, 2-5 times higher than normal levels.
Once a stock has run for several days (or weeks), sitting high on a staircase of overextended price action, the challenge lies in determining when you think the rally will end.
If a stock’s making new all-time highs (they often are near blow-off tops), it can be hard to gauge the share price valuation fundamentally.
So how do you pick a price target for calling the top? By paying attention to the trading volume…
If shares exchange hands several times more than a stock’s average daily volume, this indicates that a near-term top is imminent.
Remember that stock valuations are dynamic and change with market sentiment, but the total number of shares available to trade each day (float) remains the same.
So, if the volume’s considerably higher than the daily average, we can have some sense of where the top might be because it’s a historically comparable metric.
Just look at a daily or weekly chart and mark the all-time high volume day…
When the current rally’s volume nears this previously reached level, a blow-off top could be right around the corner. Trade accordingly.
Signal #3: Rejections at Resistance Levels
The third signal to look out for is a big rejection at a key price level.
A huge part of my trading comes down to identifying key price levels and pulling the trigger when stocks break them in either direction.
Experienced traders know that momentum stocks tend to back off near predictable, round-number price levels, such as $10, $20, $50, or $100.
Over time, it’s impossible not to see these levels. They stick out like a sore thumb (but more on that later)…
While a multiple of ten isn’t always necessary, it’s a double confirmation if the stock struggles at psychologically important price levels.
Focusing on these levels will help you buy your puts as close to the highs as possible.
With careful practice, spotting these levels (and therefore, blow-off tops) will become second nature.
AAPL’s Ridiculous Blow-Off Top
I’m bringing up this pattern because I saw a perfect example yesterday in AAPL…
After a bullish reaction to its WWDC conference on Tuesday, AAPL surged more than 7% intraday on MASSIVE trading volume.
Then, the move continued on Wednesday as AAPL surged another 5%, bumping up against a major round-number resistance level at $220.
By this point, AAPL has added $300 billion in market cap in two days. This should cause any trader to raise their eyebrows.
Notice that the stock backed off right at $219.75 and that Wednesday’s move saw a big decrease in daily trading volume from the day before…
Look at the last two volume candles and pay attention to how much the final one drops off. It was almost a 70% day-over-day decrease in trading volume.
This big volume decrease — coupled with the price rejection at $220 — told me that the euphoric move was probably running out of steam.
So, yesterday, I bought AAPL 6/21/24 $215 Puts, looking to profit off the downside when this blow-off top explodes.
After a decade of experience, I know how to identify a potential blow-off top from a mile away.
And I hope today’s lesson helps you spot them on your own.
If you pay attention to the three signals I laid out today, you could be one big blow-off top away from a major trading breakthrough.
Happy trading,
Jeff Zananiri
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*Past performance does not indicate future results
