BITA: Climax Run in the Making

Every now and then the stock market will wow us with its apparent loss of touch with reality.

In truth, however, the stock market is a lot like human beings; its paradoxical in nature, and while it may appear to make sense one day, the next day it can be all over the place.

This is especially true of stocks making new all time highs. When stocks are let loose in this manner, and buyers swarm in and push the stock even higher with no apparent end in sight, the price action will bewilder even the best of traders.

This is what we have to humbly accept when analyzing potential trades and developing our trading plans. Take what the market is giving us and let's chart our course of action accordingly.

In recent weeks, Chinese internet stocks have become all the rave. I have no idea why, and quite frankly, who cares? The stock market goes through cycles like this - a certain sector picks up momentum, and the big money flows in. As traders, we just have to follow the money.

But what happens when the big money checks out of the game? This is something we have to keep in mind. I don't advocate picking tops in stocks experiencing strong trending moves higher, but what goes up must come down, and this is especially true when the moves higher are more ferocious and jaw dropping in nature.

As an example, we'll take a look at BITA. Get ready to be amazed.

BITA: Ten Weeks in the Green

$BITA : Bitauto Holdings Limited 

Per Google Finance, Bitauto Holdings Limited is a provider of Internet content and marketing services and is based in Beijing, China. BITA trades on the New York Stock Exchange.

Looking at the weekly chart, it's evident that BITA has had an amazing run this summer. In fact, the stock has closed up ten weeks in a row, beginning with the week starting June 9th.

Since then, when BITA was trading at just $40 a share, the stock is now up nearly $35 a share, an incredible 85% move higher!

But BITA is not unique in this experience. Other Chinese internet stocks have been running higher as well. So we've got to ask ourselves: when does this party end?

Looking at the weekly chart, what stands out to us is that the last two weeks have been especially strong moves higher, compared to the eight weeks prior. The stock opened at $57.03 for the week starting August 4th and closed the week at $62.77, a spread of nearly $7.

This week was the strongest move yet, with BITA opening at $64.55 on Monday morning and closing yesterday at $75.30. The low for the week was $61.40, a difference of nearly $14 from Thursday's close. This spread in price is double the spread from the week before!

The price spread from the stock’s low to its high for the week will almost always be greater than that for any prior week since the beginning of the original move many months ago.
— William J. O'Neil, Author of "How to Make Money in Stocks," on the signs of a Climax Run

The price action for BITA is indicative of a climax run in the making.  Such climax runs are usually followed by steep pull backs in price, as traders let it all "sink in" and reassess the underlying security and its future potential.

The RSI for BITA is flashing an overbought signal, measuring near 90. Assuming sellers begin to outpace buyers, it's hard to say where support levels would be on any pullback in price, since the stock is trading in uncharted territory. We'd look for the $62/$64 area, followed by the $56 area.