Climax Top Checklist To Sell Into Strength And Take Profits
IRCTC is the only entity authorized by Indian Railways to provide online railway tickets, catering services, and packaged drinking water at railway stations and trains in India. The government of India has an 87.4% stake in the company. It has the Mini-Ratna category status.
The company’s four major revenue streams are internet ticketing, 27%; catering, 46%; packaged drinking water, 10%; travel & tourism, 17%. IRCTC is one of Asia’s most transacted websites, with around 5.5M logins per day and a transaction volume of over 25M per month.
Management had stated that July saw a ticketing volume of 34.4M versus 63.7M for April–June. Due to the pandemic, there is an increase in preference to book tickets online. Around 85% of the total train bookings were online in Q1 FY22, compared to 72% in FY20. It is expected that the current levels can sustain in the future.
As far as the e-catering segment is concerned, the average booking for Q1 FY22 was 17,000 meals per day compared with pre-COVID levels of 21,000 meals per day. It is improving gradually. With a significant reduc tion in cases and an increase in the number of vaccinations (more than 75 crore+ doses given), the growth is expected to be better than pre-COVID times.
IRCTC’s plan to foray into the hospitality sector, along with Indian Railways' asset monetization move, which is underway, is helping the stock. The government is moving toward more private trains, and IRCTC can be the front-runner in this segment.
IRCTC’s share price has been hitting newer highs over the last several days. It made a new high of Rs 3,759 today. The stock has more than doubled in just five months of FY22.
Now, the question is, what next?
While it's easy to bask in the glory of an ongoing successful trade, savvy investors know that the trade isn't over until the paper gains have been converted into realized gains. William O’Neil has written that “You'll never sell at the exact top, so stop kicking yourself when a stock goes higher after you sell. The objective is to make and take worthwhile gains and not get excited, optimistic, or greedy as a stock's price advance gets stronger!”
But this doesn't mean that selling randomly when the stock goes higher. Some rules for climax top are set, and they can be followed to identify a probable top. Selling on the way up into strength can be a tough task, but a bird in the hand is worth more than imaginary ones in the bush.
According to O’Neil methodology, we have observed the following signs of the climax top formation in IRCTC:
The ultimate top may occur on the heaviest volume day since the beginning of the advance. For IRCTC, today’s volume was highest since it broke out from the cup base on June 7.
It is a probable sell signal if a stock advance gets so active that it has a rapid price run-up for two or three weeks (eight to twelve days). This is called climax (blow-off) top activity. IRCTC has advanced more than 40% in the last three weeks.
Generally, before the stock tops, on a weekly chart, the stock will often have the largest weekly price spread, from low to high of the entire move, following a breakout. It can be observed in the case of IRCTC last week.
One other signal is to look for seven up days out of the last eight days. This can also be observed in the case of IRCTC.
If the stock is trading around 100% above its 200-DMA, along with the above signs of a climax top, it is prudent to be mindful of potential climactic action. IRCTC is trading ~95% above its 200-DMA.
In addition to the above signs observed for IRCTC, one can also look for the following signs to identify a climax top:
If a stock goes through its weekly upper channel line after a huge run-up.
After a long advance, heavy daily volume without further upside price progress indicates a sell signal.
For most stocks, the number of consecutive down days price relative to up days in price will probably increase when the stock starts to fall from its top. You may see four or five days down, followed by two or three days up, whereas before, you would have seen four days up and then two or three down.
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