Definition of Toppy


What is Toppy?

Toppy is a financial jargon term used to describe markets that are reaching unsustainable levels. The term toppy can be used to describe a stock, sector, or broad market index, such as the Standard and Poor’s 500 (S&P 500), that has had extended earnings, but there is analyst sentiment or general market consensus of that a potential reversal is imminent. A reversal is any time the direction of the trend of a stock or other type of asset changes.

Key takeaways

  • Toppy is a financial jargon term used to describe markets that are reaching unsustainable levels.
  • A sharp stock market rises to new highs and then recedes.
  • There are a few tools that trading analysts use to identify a bull market, including a reverse candlestick pattern.
  • Investors can analyze the fundamentals of a stock when they are trying to decide if the problem is down.

How Toppy works

A sharp stock market rises to new highs and then recedes. Setbacks are temporary price reversals that take place within a broader trend. Investors refer to a pullback as a pullback, a dip, or a correction, in the case of a 10% drop.

Just because a market is down doesn’t mean it will stay there for a particular period of time.

Identifying a toppy market

Chart Patterns

Technical traders can use chart patterns, such as a double top or head and shoulders top, to identify superior price action.

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

Higher chart patterns that form over several months are often more reliable than higher price action patterns over shorter periods.

Example of a double roof

Image by Sabrina Jiang © Investopedia 2021


Reversal candlestick patterns

Traders have been using Japanese candlestick patterns to spot superior price action dating back to the 16th century. Popular candlestick reversals include the bearish engulfing pattern, piercing line pattern, and dangling man pattern. All of these candlestick patterns occur near the final stages of an uptrend and show a physiological shift in investor sentiment.

Bearish divergences

Toppy price action often accompanies a bearish divergence between the price of a security and a commonly used technical indicator, such as the Relative Strength Index (RSI) or Stochastic Oscillator.

For example, a bearish divergence occurs when the price of a security reaches a higher high, but the indicator makes a lower high. Many traders use a combination of chart patterns, reversal candlesticks, and bearish divergences to help locate a higher stock or market index.

Fundamentals

Investors also analyze the fundamentals of a stock to determine if the problem is doing well compared to its peers or the industry.

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

Strategies for a toppy market

Turn to cash

While the returns for cash (including money market funds) are very low, if the market is in distress, you may want to sit a bit on your cash. What you save now can be invested later at a lower price.

Avoid buying on the dive

Buying in the fall means buying an asset after it has fallen in price. The reason for doing this is an assumption that the new lower price is a bargain because the price drop is temporary; given a certain period of time, the asset will increase in value again.

While buying on the downturn can be a good strategy in a bull market, buying overvalued tech stocks on your way down can be incredibly risky. There is a reason its price is falling and it remains to be seen what happens next.

Check 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. If you own a significant number of overvalued stocks, it might be a good time to make some profit.

Use Stop Losses

To make sure you are ensuring profit, set stop loss (even if they are mental). You can also write down a buy price, the potential sell price, and a price to exit (if you’re wrong).

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Mark Holland

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