More Reversal Patterns - Various Tops and Bottoms
Some other chart patterns that signal reversals are double tops, double bottoms, triple tops and bottoms, and rounded bottoms and tops.
A double top is formed when the price of a pair in an uptrend rises and encounters resistance. Following this, price retreats to a support level which will become the neckline and subsequently returns to the resistance level. After failing to break the resistance level a second time the pair falls back down. At the neckline price breaks down into a new downward trend.
The same but opposite scenario occurs in the case of a double bottom. A downtrend reverses after testing a certain support level twice. Failing to breakthrough, price reverses into a new uptrend. Sometimes, the pair will retest the neckline, which should switch its role from support to resistance.
Triple Tops / Triple Bottoms
In the typical triple top formation each one of the heads is about the same size. A line of resistance can be drawn connecting the three tops. A neckline should be drawn connecting the support levels. After the third head, price falls below the neckline. The market may rebound for a short attempt at breaking back past the neckline only to be followed by the start of a new downward trend.
To the right is an example of a triple top. Notice that the neckline is slanted upwards instead of perfectly horizontal, which is normal. For all of these patterns, a trader will be hard pressed to find them exactly as they are shown in their theoretical forms
Rounded Tops/ Rounded Bottoms
Another variation of the shape a top and bottom can take is one in which the reversal is "rounded". The rounded top formation forms when the market gradually yet steadily shifts from a bullish to bearish outlook while in the case of a rounded bottom, from bearish to bullish. The prices take on a bowl shaped pattern as the market slowly and casually changes from an upward to a downward trend.
Last Modified: 2009/10/27 20:43:08