Anatomy Of A Topping Formation

We employ a modified point and figure approach as our preferred technical analysis tool.  We take in the price of every security in the MSCI World Index and convert is into USD.  Next we take in the price of all the various indexes and aggregates and convert them into USD.  Next we calculate a ratio of the relative price of every security compared the MSCI World Index.  We then plot the result of this ratio with our Xs and Os.  Each X and O represents a 2.5% relative price change, and the threshold for a reversal is 3 boxes, or 7.5%.

The reversal of a long-term uptrend is an important behavior to spot because it often leads to subsequent losses.  Identifying and removing companies from an investment portfolio that are displaying long-term topping behavior is an important part of risk management--a pulling of the weeds approach.  After all, a portfolio full of underperforming stocks should be expected to underperform.

The following list if drawn from the MSCI World North America Index and it represents the most worrisome looking topping formations.  In all cases, four year uptrend lines are being violated after a period of consolidation.  These are all very classic examples of stocks that should be avoided.