Buying Climax: What, Why and How

Buying Climax:

is a situation on the chart that represents ‘exhaustion’. This is the sharpest upward price surge where the last set of buyers enter the stock, thinking that the stock is going to the moon and never look back. This also reflects ‘Greed’ entering in to the stock. Investors who bought at the lower prices, during accumulation, take it as an opportunity to exit from the stock. Therefore, it represents those pre-conditions that lead to price correction.

The climax is associated with very wide range up bars/candles with exceptional volumes, followed by supply in most cases.

I will take up the case of Dr. Reddy with no particular reason but as a good example that just came in front of me and I thought it will be a good idea to share with the trading community what a climactic action looks like.

Dr. Reddy had been in a downtrend between Oct2015 to Aug2017. It then consolidated for more than 2years before it decisively broke out of Rs2800 supply zone in Jan-Feb2020. It retested the supply zone in Mar2020 market correction and held it as a new support.

Thereafter we can observe three major breakouts seen on this weekly chart, which would help us in understanding a buying climax in a better way.

At every breakout you need to observe the range of the breakout candle and the volume involved in the breakout. A good breakout needs a wider candle with a strong closing and good volume. Let us see what happened.

Breakout 1
Range of the candle – 600 pts or around 18%
This seems an average type of range compared to the pre-breakout candles. So nothing alarming here.

Volume –
Slightly higher than the average volumes.

Breakout 2
Range of the candle – 600 pts or around 15%
It’s also an average type of range

Volume –
Is very high, more than any candle in this uptrend since 2020

Breakout 3
Range of the candle – 1160 pts or around 27%
This is exceptionally wide range

Volume –
Exceptionally high (More than 36mn). Not seen anywhere on the chart.
This is buying climax. You can see that, on the very next week, there was extremely high volume on the downside. This further validates that seller have entered the market and the upside could be limited.

We can draw a resistance line from this Sep2020 highs. Price corrected 25% from this resistance in the next 5-6months.

Also observe the Breakout4 (Jun2021) of the resistance (vertical dotted line)
Candle Range – narrow
Candle volume – very low compared to previous breakouts.
This is a weak breakout which could not sustain and is followed by a big supply candle. Further indication that the stock has lost steam.

I hope this idea was helpful.
Do like and comment for more such educational posts in the coming days.

Comment:

Another example of Adani ports weekly chart. It does not always mean an immediate change in trend. If there was a humungous trend in the background, buying climax may lead to consolidation or sideways action before any decisive move.

Comment:

Example3

Comment:

Exceptions.
Sometimes trailing stops is the best exercise.

Comment:

This was not buying climax due to narrow range of the candle.

Comment:

Just reverse the chart upside down and opposite is true for selling climax.
Good luck and trade safe in volatile markets.