Forex Strategies Resources

20# Triple Top Reversal Pattern

Triple Top Reversal Pattern
Triple Top Reversal Pattern
Triple Top Reversal Pattern

Triple Top is a pattern very similar to the Double Top -- only there are three distinctive tops rather than two. A triple top formation is a distinct chart pattern characterized by a rally to a new high followed by a moderate pullback and a second rally to test the new high. As the stock rallies to make the second peak (top) sellers overwhelm buyers and the stock price falters again This process is repeated a third time but buyers finally submit, support levels are broken and a massive decline ensues.

The technical target for Triple tops is derived by subtracting the point difference between the top #1 and the reaction low from the breakout level. After the third top has been created, the breakout level is the low created between tops #2 and #3.

No triple top formation is complete until the stock falls through this point.

• For a valid triple top volume should decline on rallies toward tops #2 and #3 and increase into weakness. These volume trends confirm that distribution is taking place into strength.

• Although the lows made during the trough between tops #2 and #3 will often exceed the reaction low, such price action is not necessary during the formation of a triple top.

• No triple top is truly complete until the stock in question closes below the lows made during the trough between tops #2 and #3.

• Downside breakouts often lead to small 2-3% declines followed by an immediate test of the breakout level. If the stock closes above this level (now resistance) for any reason the pattern becomes invalid.

Triple Tops occur largely for two reasons. First, those investors that purchased the stock "correctly" (at lower prices) use good news to liquidate their position. In this sense the triple top is a distribution pattern because smart buyers are distributing stock.

Second, those investors that purchased the stock "wrongly" on the good news refuse to exit their positions until they can do so without suffering a loss. Triple tops occur after extended rallies leading to new highs. As the "story" of the stock becomes more widely accepted investors are willing to pay increasingly exorbitant prices but at some point those investors that purchased the stock at lower levels feel the urge to take profits.

 


Normally, the bulk of these sellers will use a positive news event such as an earnings report, analyst upgrade or stock split announcement to begin unwinding long positions. This selling pressure on good news creates resistance, prices begin to fall (top #1). This first top will normally be sufficient to force many of the more speculative investors from the stock. As they sell the price of the stock falls further but many investors will not sell regardless of how far the price falls because they refuse to take a loss.

After several sessions of poor price performance the stock will begin to stabilize creating what technical traders call a reaction low because this move lower was a reaction to the news events of top #1. Slowly the stock begins to move higher. In most cases this advance will occur because the actual fundamental news remains positive. As the stock rises volume slows and investors that did not sell or bought at the first top get ready to exit positions into further strength.

As the stock approaches the prior high volume surges and new buyers begin to talk about the continued bright fundamental prospects -- it looks as though new highs are imminent. It is at that moment that all of the investors that want to sell existing positions begin selling. Volume surges and the stock soon retreats (top #2). On the chart two equal peaks are created and recent buyers begin to realize that resistance at these levels is formidable. Selling begins and the stock moves lower on increased volume as recent buyers panic.

In most cases the stock will actually fall through the reaction low, setting-up a perfect double top pattern but as this key support level is violated, selling does not intensify, in fact, a rally quickly ensues as short sellers begin to cover positions. Against the backdrop of more positive news and short covering the stock quickly moves toward the old high. Volume is light but there is continued talk of bright fundamental prospects and new highs. As the stock reaches the prior tops volume accelerates and a distinct third "top" is created (top #3).

The failure to move through formidable resistance helps to reinvigorate bearish investors and for the first time, the stock's valuation is questioned in the media. The stock price begins to plummet, recent buyers begin selling at any cost. The stock falls through the lows set at the trough between top #2 and top #3. The triple top is complete. In many cases double top formations lead to important declines because two separate sets of buyers have been disappointed at distinct levels, the tops and the reaction lows. These levels become formidable resistance.

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A triple top is considered to be a variation of the head and shoulders top. Often the only thing that differentiates a triple top from a head and shoulders top is the fact that the three peaks that make up the triple top are more or less at the same level. The head and shoulders top displays a higher peak - the "head" - between the two shoulders.

What does a triple top look like?

As shown below, the triple top pattern is comprised of three sharp peaks, all at the same level. A triple top occurs when prices are in an uptrend. Prices rise to a resistance level, retreat, return to the resistance level again, retreat, and finally, return to that resistance level for a third time before declining. In a classic triple top, the decline following the third peak marks the beginning of a downtrend.

What are the details that I should pay attention to in the triple top?

1. Duration of the Pattern

This pattern can take upwards of several months to form.The three highs do not need to be equally spaced from one another.

2. Need for an Uptrend

The triple top is a reversal pattern marking the transition period between an uptrend and a downtrend in prices. It is crucial to the existence of this pattern that it begin with an uptrend of stock prices.

3. Decisive Breakout

Investors are advised to wait for prices to make a definitive break below the confirmation point of a triple top pattern. If prices do not fall below the confirmation point after the third peak is reached, the pattern is not a triple top.

4. Volume

It is typical to see volume diminish as the pattern progresses. This should change, however, when breakout occurs. A valid breakout should be accompanied by a burst in volume.

5. Rally after Breakout

A high percentage of triple tops have rallies back to the point of the breakdown more often than not.

Are there variations in the pattern that I should know about?

1. Hybrid Variation

There is a hybrid variation that appears to be a cross between a double and triple top. The middle peak is slightly lower than the left and right peaks. This is still a valid reversal pattern.

2. Fourth Peak

It is possible for the pattern to display a fourth peak before reversal occurs.

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