ANALYZING CHART PATTERNS: TRIPLE TOPS
The triple top and
triple bottom are reversal patterns that are formulated when a security
attempts to move past a key level of support or resistance in the direction of
the prevailing trend.
This chart pattern
represents the market's attempt to move a security in a certain direction.
After three failed attempts, the buyers (in the case of a top) or sellers (in
the case of a bottom) give up, and the opposing group in the market takes a
hold of the security, sending it downward (sellers) or upward (buyers).
Triple Top
This bearish reversal
pattern is formed when a security that is trending upward tests a similar level
of resistance three times without breaking through. Each time the security
tests the resistance level, it falls to a similar area of support. After the
third fall to the support level, the pattern is complete when the security
falls through the support; the price is then expected to move in a downward
trend.
Triple top
reversal
The first step in
this pattern is the creation of a new high in an uptrend that is stalled by
selling pressure, which forms a level of resistance. The selling pressure
causes the price to fall until it finds a level of support, as buyers move back
into the security. The buying pressure sends the price back up to the area of
resistance the security previously met. Again, the sellers enter the market and
send the security back down to the support level.
This up-and-down
movement is repeated for the third time; but this time the buyers, after
failing three times, give up on the security, and the sellers take over. Upon
falling through the level of support, the security is expected to trend
downward.
This pattern can be
difficult to spot in the early stages as it will initially look like a
double-top pattern, which was discussed in a previous section. The most
important thing here is that one waits for the price to move past the level of
resistance before entering the security, as the security could actually just
end up being range-bound, where it trades between the two levels for some time.
In the triple-top
formation, each test of resistance at the upper end should be marked with
declining volume at each successive peak. And again, when the price breaks
below the support level, it should be accompanied by high volume.
Once the signal is
formed, the price objective is based on the size of the chart pattern or the
price distance between the level of resistance and support. This is then
deducted from the breakout point.
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