What Is a Blow-Off Top?

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.

Understanding the Blow-Off Top

Blow-off tops occur in all markets and can impact stocks, futures, commodities, bonds, and currencies. A blow-off top indicates that a security’s price is about to fall. This does not mean the price will fall immediately though. The rising part of a blow-off can last weeks. The early part of this rise may look exceptional, with big daily and weekly price gains. Yet, sometimes, it still may continue to escalate for several more weeks.

It is hard to judge when exactly a blow-off top is in its reversal stage (and not just a pullback) until the price starts dropping. Even then, it sometimes isn't until four or five days after the decline starts that it can be called a blow-off top. This is because when a security is rising rapidly, the price may pull back for a few days but then continue rising.

A blow-off top has several key traits, yet it is only in hindsight that we know if it created an actual top in price. Sometimes the price will rise rapidly, then pause or pull back slightly, and then keep rising. Therefore, the blow-off top must be composed of a steep rise and steep fall to qualify.

Blow-off top patterns are common in securities where there is a lot of speculative interest. Prices rise, usually on positive news or on the prospect of good future news, such as future growth or the release of a positive drug trial, for example.

As the price rises, more and more people get excited. More people also start to feel they are missing out, and they don't want to miss out anymore, so they buy. The higher the price goes, the greater the number of people lured in to buy, resulting in further price increases and rising volume.

Blow-off tops are often exceptionally volatile. Near the end, when the reversal is occurring, slippage on orders is far more likely as the price is moving so fast. Once the price starts to drop, it can be very difficult to get out anywhere close to the top because everyone rushes for the exits, selling, all at once.

After the massive rise, and so many people buying, there is no one left to buy. However, there are lots of people who are panicking to sell, locking in profits, or trying to limit losses.

Identifying Blow-Off Tops

Early on, blow-off tops may appear similar to strong rallies. A strong rally may rise at a 45-degree angle, but in a blow-off situation the angle of ascent is almost vertical.

Some common characteristics of blow-off tops include:

• Limited Pullbacks: Blow-off tops are massive—near vertical—rallies with no substantial pullbacks. This differentiates them from securities that are simply in a strong uptrend. If pullbacks do occur, they are typically only one to three days, after which the price rallies again.
• Massive Price Increases: These types of tops don't come after mediocre rises. The price may rise a few hundred or even a few thousand percent, with the biggest dollar (not necessarily percentage) gains in the stock price coming in the last week or few days of the move.
• Bearish Volume: Blow-off tops are followed by sharp moves lower on massive volume, which indicates that long traders are exiting the stock in droves.
• Broader Market: Blow-off tops are often exacerbated by wider market conditions, which means that a broad market sell-off could lead to a move lower.

If traders have misidentified a blow-off top, or traded it wrong, it’s often best to exit the position early on to avoid becoming a bag holder. Going short too early in a blow-off can mean extremely large losses if the loss isn't cut quickly. Similarly, going long too late in a blow-off top scenario can mean huge losses when the price starts dropping and doesn't go back to prior levels.

Those who successfully identify blow-off tops have a unique opportunity to capitalize on the overreaction of other traders.

Example of a Blow-Off Top in Bitcoin

In 2017, bitcoin was seeing a steady price rise. Early in the year, it traded briefly above $1,000 and briefly below $800, but then started to creep higher out of that range. By mid-year, it was approaching $3,000. By September it tested $5,000, and by October it tested $6,000. At this point, the blow-off hadn't even started, even though the price was already higher by several hundred percent.

Volume started picking up in November but increased more in December. In December alone, the price went from $10,000 to nearly $20,000. This was by far the biggest dollar gain in the price.

During the main part of the blow-off in December, the longest pullback was three days before the price started rising again. Once the price started to reverse, it dropped for six days straight.

The selling started out slowly, which doesn't always happen. The price started dropping on relatively low volume, but as the price kept dropping (few buyers left to support the price) there is a massive selling volume spike on the sixth day of the decline. On that day, a whole bunch of buyers got flushed out on a massive intraday drop where the price moved more than $500.