How Blow-Off Tops Can Lead to Perfect Put Trades

by | May 5, 2022

They say stocks take the stairs up…and the elevator down. 

That’s why I prefer trading puts, because if you can nail these trades, the profits can come in hard and fast. 

Of course, it’s only profitable if you can get the timing right. 

And that’s what I want to talk to you about today. 

It’s a question I receive a lot…

How do I know exactly when these overextended stocks are gonna crash?

The answer lies in identifying blow-off tops — which could lead to highly profitable first red days.

Blow-off tops happen in a single day when a stock forms a euphoric peak of volume and price action.

If you know what to look for, blow-off tops are pretty easy to spot. 

And they’re critical to understand as they can help you time your trades to perfection.

So how do I determine when a blow-off top might take place? 

And how can YOU learn to identify them yourself?

Let’s break it down…

The 3 Signs of a Blow-Off Top

There are three telltale signals that I always look for when trying to identify a blow-off top:

Signal #1: The stock is up 30%+ in a few weeks (or less)…

The % number here will vary depending on how volatile the stock is. 

That said, I generally find a 30% move in a matter of weeks to be ripe for a blow-off top.

If it’s a serious runner (or a meme stock), it could surge as much as 100% in a few weeks without breaking a sweat.

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These are the best stocks to buy puts on and the ones I’m constantly looking for. 

Why? Because the crash is inevitable — and the downside is enormous. 

Signal #2: The average daily trading volume is 2-5x normal levels…

A big % move in a matter of weeks isn’t enough to spot a blow-off top. (Remember: You’re looking for a single day of crazy price action to pinpoint.)

You need to confirm the blow-off top day by making sure the daily trading volume is 2-5x normal levels.

A big green volume candle following a bunch of smaller green ones is a strong indicator that a blow-off top could be right around the corner.

If you have volume bars on the bottom of your charts, this should be easy to see. 

If you don’t have clear and clean charts — you’ve gotta change that. I recommend StocksToTrade, the program I’ve charted in every single day for years. 

Signal #3: The price action struggles at a crucial round-number resistance level…

The third signal I look for is a big rejection at a crucial price level. 

If you look at charts for years and years like I have, you’ll start to notice that momentum stocks tend to back off near predictable, round-number price levels.

$10, $20, $50, $100 — depending on the chart, any of these levels could pose potential round-number resistance.

NOTE: A rejection at a multiple of ten isn’t necessary for a blow-off top, and blow-off tops can occur outside of these round numbers. But I look at it as double confirmation if you get the big rejection at psychologically important price levels.

Bottom line: You want to buy your puts as close to the highs as you can. By diligently searching for the signals I just mentioned, you’ll have the right outlook for nailing put trades. 

Then, you’ll start to see blow-off tops visually (without having to think too much about the signals). 

With experience, blow-off tops stick out like a sore thumb. That’s how I called the top in oil stocks back in March…

Recent Example: An Epic Blow-Off Top in Oil Stocks

Let’s look at a recent example of a blow-off top that occurred in the United States Oil Fund (NYSE: USO).

Take a peek at this chart and see if you can spot the blow-off top just by looking at it:

In early March, as the Russia-Ukraine conflict was initially escalating … oil stocks went parabolic

USO surged 33% in eleven trading days from February 25 to March 8, when it crescendoed into a beautiful blow-off top. 

On March 8, the daily trading volume for USO was 30 million (when it normally trades around 10 million shares per day). 

Like I said, when the volume is 2-5x normal levels — with share price peaking simultaneously — it’s time to pay attention. You just might be looking at a textbook blow-off top…

On March 9, the first red day, USO was down as much as 15% intraday. Meanwhile, the puts soared hundreds of %! 

This is a textbook example of how the signals I laid out today can lead you to perfect put-trading opportunities. 

Final Thoughts

Blow-off tops aren’t complicated, which is exactly why they’re a vital pillar of my put-trading strategy.

After a decade of experience, I know how to spot a blow-off top from a mile away. 

And over the coming weeks, I’m gonna teach everyone reading this to do the same…

Stay tuned. Stay disciplined. And most of all, stay hungry to win.

In the meantime, take this opportunity to improve your skills. You could be one trade, or strategy away from turning the corner. 

If you need help, then I encourage you check out this exclusive training.

Meet Mark:

Mark Croock is a former accountant who after studying under Millionaire Trader Tim Sykes turned his small account into $3.19 Million in trading profits by applying Tim’s strategies to options trading.

He started Evolved Trader to pay it forward and help other traders learn how to leverage options

 

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