25# Broadening Top Bearish Reversal
Broadening Top is a rally to a new
high, weakness to an intermediate
support level, a second rally to a
higher high on increased volume and
decline through the intermediate
support level, a third rally to a higher
high on strong volume followed by a
Because Broadening Tops are very
large reversal patterns, the technical
implications are usually extreme.
The measured target is derived by subtracting the height of the pattern from the eventual breakout level.
• Unlike most consolidation patterns, broadening tops feature increasing wide ranges and greater volatility as time passes.
• Volume increases as the share prices rises. Normally this is bullish but rallies prove very short-lived and declines "take-out" previous support levels.
• Broadening formations are only found in topping formations because they are the product of unrealistic expectations on the part of bullish investors.
• 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.
Whereas some technical patterns are characterized by consensus and a general lack of volatility, the same cannot be said about the broadening top. These patterns always feature indecision and extreme volatility. When one looks at the pattern the resemblance to a megaphone is striking. The stock makes a series of higher highs and lower lows. Normally as time passes and more information is disseminated, investors come to consensus and volatility slows but just the opposite is true of broadening tops.
There are distinct parts of every broadening top formation. The first of three small tops (top #1) occurs after a spectacular run to new high on increasing volume. Generally, this advance will be the result of better than expected earnings, a new product and/or a barrage of Wall Street recommendations. However, as the stock surges to new highs sellers also step-up selling efforts and it is not long before the stock settles back to a prior support level (a).
After several sessions of slower trade more positive news pushes the stock to yet another new high on increased volume (top #2). The increased volume should be a sign that bullish consensus is building but once again the stock falters, falling to a relative new low (b) just days after making a new high. Although the news flow is still very positive, rumors begin to circulate that some institutions and insiders are beginning to liquidate positions.
It is at this time that there is a full scale defense of the stock by bullish investors. Wall Street firms make new recommendations with lofty price targets and once again, the stock begins to move higher. Although volume is strong, it is noticeably less than the prior rallies. The stock moves to third new high (top #3) in as many attempts. All of the news is positive. The company may be raising guidance, setting a stock split or talking about the outlook for new products. The prospects seem bright but even as the stock is making a new high, there is skepticism among some investors. Days later the stock begins to falter on increased volume but no specific news. Several days later the stock is collapsing and support at the most recent low is in jeopardy. There is news that a large shareholder has filed to sell stock, bullish investors panic. Weeks later the stock sinks back to the longer-term support level.