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Topping Price Formation - Bubble Top

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. People justify paying very high prices by saying "It's different this time."; so they pay more and more for the stock causing a price bubble to form. Eventually the buying binge ends and the price bubble bursts sending prices plunging to the downside.

Below is a bubble top chart of weekly closes from Yahoo! Finance for Cisco (CSCO). After the bubble burst, the stock price remained well below the bubble high for years.


See Price Bubbles - Housing Market and Price Bubbles - NASDAQ Stock Market March 2000.


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