Stock Chart Patterns – Triple-Top Signal Points to Downtrend

by | August 7, 2009 2:49 am

Stock Chart Patterns – Triple-Top Signal Points to Downtrend

A triple-top is considered to be a variation of the head-and-shoulders top[1]. Often the only thing that differentiates a triple-top from a head-and-shoulders top is the fact that the three peaks that compose the triple-top are at about the same levels. The head-and-shoulders pattern has a higher peak — or the “head” — between the two “shoulders.”

Most experts believe that the distinction between the two patterns is largely academic because both formations indicate the same thing: “reversal” patterns of a stock’s upward trend. The triple-top marks an uptrend that is in the process of changing into a downtrend.

What Does a Triple-top Look Like?

The triple-top pattern is made of three sharp peaks, all at the same level. A triple-top occurs when stock prices are rising.

First, prices climb to a resistance level[2], retreat, return to the resistance level, retreat a second time, and, finally, return to the same resistance level for a third time before falling. In a classic triple-top, the decline that follows the third peak indicates the beginning of a stock’s downtrend.

triple top chart Stock Chart Patterns   Triple Top Signal Points to Downtrend

While each of the three peaks will be sharp and distinct, the triple-top’s lows may appear as more-rounded valleys. The pattern concludes when prices drop below the formation’s lowest low, which is also called the “confirmation point.”

Why is it Important?

Like the head-and-shoulders top, which it closely resembles, experts consider the triple-top to be reliable. The pattern illustrates a stock’s three consecutive attempts to break through a resistance level. Despite three separate tries, the stock’s price cannot move above a certain point.

The significance of volume in a triple-top

Generally, as the pattern forms, volume in a triple-top tends to be downward. Volume increases as prices fall below the confirmation point and break into the new downward trend.

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What Details Should I Pay Attention To?

1. Duration of the Pattern

This pattern can take several months or more to form. Most technicians agree that the longer the pattern takes to develop, the more significant the price move will be once the breakout occurs. The three highs need not be equally spaced from one another.

2. Need for an Uptrend

The triple-top is a reversal pattern that marks the period of transition between an uptrend and a downtrend in a stock’s pricing. It is imperative to the triple-top’s pattern that it launches with an uptrend of stock prices.

3. Decisive Breakout

Traders are advised to wait for prices to definitively break below the triple-top’s confirmation point. If prices don’t fall below the confirmation point after the third peak is reached, then the pattern is not a triple-top.

In a bull market, for instance, investors may commonly see three highs that look like the beginning of a well-formed triple-top. However, if prices fail to fall below the confirmation point, they can just as easily pull away from highs established by the three peaks, then continue their upward trend.

4. Volume

As mentioned earlier, typically volume[3] diminishes as the pattern progresses. However, this should change when breakout occurs. A valid breakout should be coupled with a burst in volume.

How to Trade the Triple-top

Begin by calculating the target price, which is the minimum expected price move. The triple-top is measured in a way similar to how the head-and-shoulders top is determined.

Calculate the height of the pattern by subtracting the formation’s lowest low from the highest high. Then, subtract the height from the lowest low. Essentially, a trader can expect the price to move downward at least the distance from the breakout point less the pattern’s height.

For example, assume the lowest low of the triple-top is 150 and the highest high is 200. The height of the pattern equals 50 (200 – 150 = 50). The minimum target price is 100 (150 – 50 = 100).


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Endnotes:
  1. head-and-shoulders top: http://www.optionszone.com/learn-more/john-lansing/chart-analysis-101-head-and-shoulders-top.html
  2. resistance level: http://www.optionszone.com/learn-more/john-lansing/chart-analysis-resistance-and-support-levels-part2.html
  3. volume: http://www.optionszone.com/learn-more/john-lansing/trading-volume.html
  4. Get your FREE copy here!: http://www.optionszone.com/order/?sid=HB3208

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