Price Patterns - A Bubble Top Is an Extreme Pattern

Investors frequently bid up the price of a stock to unsustainable levels. Prices make new highs day and day, week after week and month after month. It seems prices will go up forever and the sky is the limit. People justify paying very high prices by saying "It's different this time" so they keeping paying more and more for the stock causing a price bubble to form. Eventually the buying binge ends and the price bubble bursts sending prices to the downside.

Sun Microsystems (SUNW), a computer hardware and software company, made a spectacular bubble top that ended very badly in 2000. Investors pushed up the price of SUNW from $5.05 on October 8, 1998 to a peak of $64.32 on September 1, 2000, a 1173.66% gain. Then the buying spree ended and SUNW tumbled to $2.42 by October 4, 2002, a 96% decline. Many SUNW investors made huge amounts of money on the upside. But others lost substantial amounts on the downside.

The price chart of SUNW daily closes shows the price upside, bubble top and prolonged downside.

Percent Returns for All Buy and Sell Combinations

The percent returns chart shows the gains and losses for the monthly buy and sell combinations from January 1995 through May 2005. The bubble top has the largest percent return.

The green areas represent the profitable returns and the red areas represent the unprofitable returns. Of the 7,750 buy and sell combinations (trades) 4,617 (59.57%) made money and 3,133 (40.43%) did not.

The large red area in the right portion of the chart is the result of buying on the upside before the bubble top and selling on the downside after the bubble top plus buying and selling on the downside after the bubble top.

Winners and Losers Map

The winners and losers map has no relief so it simply shows the profitable trades in green and the unprofitable trades in red. The blue vertical line delineates the buy upside (before the bubble top) and sell upside trades from the buy upside and sell downside (after the bubble top) trades. The blue horizontal lines delineates the buy upside and sell downside trades from the buy downside and sell downside trades.

The dark green area represents the highest profitable returns of the buy and sell combinations that occurred during the topping formation.

The buy upside and sell upside trades are represented in the predominantly green area in the upper left of the map. Most (95.04%) of these buy and sell combinations made money. The buy upside and sell downside trades occur in the upper right portion of the map. About one half (52.53%) of these trades made money. The buy downside and sell downside trades are located in the front right portion of the map. Only 26.07% made money so most of that area is red.

Winners and Losers Summary Table

The complete set of buy and sell combination data is listed in the winners and losers summary table.

SUNW - Bubble Top Winners and Losers Summary
Measure	All	Buy Upside/Sell Upside	Buy Upside/Sell Downside	Buy Downside/Sell Downside
Number Trades	7,750	2,278	3,876	1,596
Number Winners	4,617	2,165	2,036	416
Percent Winners	59.57%	95.04%	52.53%	26.07%
Number Losers	3,133	113	1,840	1,180
Percent Losers	40.43%	4.96%	47.47%	73.93%

Related Articles:

Anatomy of a Bubble Top
Price Patterns - Bump and Run Reversal Top Defines Price Bubble
Price Patterns - A Double Top Signals a Downside
Price Patterns - Head and Shoulders Top Has Three Tops
Price Patterns - Triple Top Signals End of Upside Move
Price Upsides Often Occur in Three Stages

Updated February 25, 2008.