Stock charts print many unique topping formations. Some
classics, such as the Descending Triangle, can be understood and traded with
very little effort. But the emotional crowd also generates many undependable patterns as
greed slowly evolves into mindless fear. Complex Rising Wedges will defy a
technicians best effort at prediction while the odd Diamond pattern
burns trading capital swinging randomly back and forth.
Skilled traders avoid these fruitless positions and only
seek profit where the odds strongly favor their play. They first locate a common feature
found in most topping reversals: price draws at least one lower high within the broad
congestion before violating a major uptrend. This common double top mechanism becomes the
focus for their trade entry. From this well-marked signpost, they follow price to a
natural breaking point and enter when violated.
Do you recall the Adam & Eve Bottom,
featured earlier in this column? This unique formation consists of a spiking first bottom,
followed by a rounded second one. Flip the pattern over and youll find a highly
predictive structure for trading these topping reversals.
This simple Adam and Eve Top provides
traders with frequent high profit short sales opportunities. Note this classic pattern in
Quantums chart. Price never drew a third high before entering a significant bear
market. Successful A&E short sales can be entered on the first violation of the
reaction low, regardless of an underlying trend. However, use tight stops to avoid
"turtle reversals". These occur when sharp short covering rallies suddenly erupt
right after the gunning of stops below a violation point.
Each uptrend generates positive sentiment that must be
overcome through the topping structure. A&E tops represent an efficient bar structure
to accomplish this task. The violent reversal of Adam first awakens fear. Then the slow
dome of Eve absorbs the remaining bull impulse while dissipating volatility needed to
resume a rally. As the dome completes, price moves swiftly to lower levels without
Observant technicians will recognize the mechanics of Descending
Triangles and Adam & Eve formations in more complex reversals.
The vast majority of tops contain some characteristics of these familiar patterns. Crowd
enthusiasm must be eliminated for a decline to proceed. Through the repeated failure of
price to achieve new highs, buying interest eventually recedes. Then the market can
finally drop from its own weight.