A blow-off top is a ballistic run where a stock makes its final, ballistic move in a long run and then rolls over and gives most of the final run back and even more in some instances. It is thus a good thing to recognize when it occurs as it can cost you some big gains. Better to lock in then pick up the stock again after it forms up another good pattern and breaks out, that is, if it does.
The basic difference between a “proper” breakout and a blow-off top is that the former will come from a solid, well-developed pattern while the latter occurs after a long run, typically after the breakout and run higher in a late stage base. A late stage base is a fourth or fifth base such as a cup with handle in a series of bases and breakouts. A blow-off top is characterized by extreme high volume and a very rapid increase in price, followed by a relatively rapid sell-off. Volume in a blow-off top is on the strongest or close to strongest volume of the run. A breakout, on the other hand, is when a stock is just beginning a run, showing a definite surge in volume (though not ballistic) as it moves out of the well-defined pattern, and will in most cases fall back but can catch support on the test and continue the trend higher.
A stock can, in a blow-ff top, gain 50% to 100% in a short time (usually occurring over a few days) on extreme volume. What accounts for the huge volume? It becomes a ‘got to have’ stock. The big money that bought when it made one of its breakouts from its series of bases leading up to this move is using the rush of buyers to exit the stock. Hence the huge volume. The trouble is that by this time it is really too late since the stock has already made its run. A good example of this is QCOM in late 1999. The stock had been trending upward mid-year after bouncing up its moving averages then on huge volume blasted up into a blow-off top as technology stocks had their glory days. It tested briefly then blasted up again; this time volume was markedly lower and the stock’s stretch was doomed. The stock retraced every bit of the move within 6 months. While the bear market of course did not help it get back on its feet, it is just now starting to show life, breaking out of a small double bottom with handle last week.
Thus, the key to confirming the difference between the two is to understand how the stock has been moving prior to the move higher. Was it in a good pattern, or did the stock just blast out of a steady uptrend on screaming volume? In other words, where in the life history is the stock and is it showing attributes of excess.