Professor Elam

Weekend July 19,  2015

How Market Tops and Bottoms are Formed

Market tops take a long time to form and then fall. Why?  Market tops happen among positive social mood. Eventually the number of stocks still participating in the up move dwindle. This is failed leadership and evidence of a  divergence. What then happens is that more and more participants hold fewer and fewer stocks. Eventually we run out of buyers or true believers. That has already happened in the Transports, Utilities, REITs.  {Positive mood  lasts longer than negative mood. 

The commodity or stock is out of favor, which energy certainly is now. This usually leads to a final moment of negative capitulation when participants throw the shares of whatever out the window. As the selling climaxes, the shares are held in fewer and fewer hands and the sellers outnumber the buyers on the way down. Once the selling is exhausted, only  a few players are in control. Then when someone wants to buy the price shoots up quickly as the sellers are in total control of the market, i.e., only a handful own most of the shares. They can name their price. 

Check out the July 19 weekend post at 

The Market Perspective.