10/9/2019 Climax Definition
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Climax
REVIEWED BY JAMES CHEN | Updated Jul 24, 2019
What Is a Climax?
A climax occurs at the end of a bull or bear market cycle and is characterized by
escalated trading volume and sharp price movements. Climaxes are usually
preceded by extreme sentiment readings, either excessive euphoria at market
peaks, or excessive pessimism at market bottoms.
KEY TAKEAWAYS
A climax occurs at the end of a bull or bear market cycle and is
characterized by escalated trading volume and sharp price movements.
Climaxes are usually preceded by extreme sentiment readings, either
excessive euphoria at market peaks, or excessive pessimism at market
bottoms.
Essentially, climaxes are a result of supply and demand factors.
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10/9/2019 Climax Definition
Understanding Climax
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Climaxes often occur at the end of bull or bear cycles. Investors become
complacent to the risks inherent in markets, and believe strongly that the trend
presently in place is not going to reverse course in the near term. Shorter-term
climaxes may be the result of new announcements or developments pushing a
value to new levels. Essentially, climaxes are a result of supply and demand
factors. They occur from a last rush of investors who buy into a rising market or Advertisement
sell into a declining market. In both situations, a climax usually signals the end of
a strong bullish or bearish market trend.
Buying Climaxes
One of the clearest signals of the end of a bull market is a buying climax, during
which volume escalates to extreme levels and bullish euphoria permeates media
coverage of stocks, market indices, or commodities. The key trait of a buying
climax is the exhaustion of demand as the last buyers enter the market. The final
surge of buying typically leads to price spikes, which may last for days, weeks, or
months. As demand wanes, buyers become less willing to pay higher prices. Advertisement
There may be a brief period of stagnation in prices before a combination of profit
taking and new sellers set in motion the start of a sharp reversal.
The end of the tech bubble in the year 2000 is a prime example of a buying
climax. Starting in November 1999, the NASDAQ Composite gained 65% on its Advertisement
way to its buying climax high of 5,132 in March 2000. During this time frame the
index saw steadily increasing volume based on euphoria over the New Economy.
Over the following 30 months ending in September 2002, the index declined by
76%.
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10/9/2019 Climax Definition
76%.
Selling Climaxes
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The beginning of a selling climax is often signaled by steadily increasing volume
on the sell side of the market as growing pessimism accelerates the downtrend.
As the selling climax approaches, the last buyers finally capitulate, driving shares
sharply lower. Once the supply side of the market abates, demand at support Advertisement
levels can cause the price to level off before a combination of profit taking and
new buyers set in motion the start of a sharp reversal.
A rebound in oil prices in early 2016 is an example of a selling climax. After
making a high in June 2014, oil prices declined steadily for 17 months, capped by
a selling climax in January 2016. After making its selling climax low of $26.55 per
barrel on Jan. 20, 2016, oil prices appreciated by 80% over the following four
months.
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Related Terms
Bear Market Definition
A bear market is a market where securities prices fall and widespread pessimism causes a negative sentiment to be self-sustaining. more
Capitulation Definition
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10/9/2019 Climax Definition
Capitulation is when investors give up any previous gains in a security or securities by selling as prices fall. more
Bull Market Definition
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A bull market is a financial market of a group of securities in which prices are rising or are expected to rise. more
Sentiment Indicator Definition and Example
A sentiment indicator is a graphical or numerical indicator designed to show how a group feels about the market or economy. Sentiment
indicators are used by some traders to forecast future behavior and market or economy direction. more
Rounding Bottom Definition
A rounding bottom is a chart pattern used in technical analysis that is identified by a series of price movements that graphically form the
shape of a "U." more
Triple Bottom
A triple bottom is a bullish chart pattern used in technical analysis that is characterized by three equal lows followed by a breakout above
resistance. more
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