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7.6 More Reversal Patterns - Various Tops and Bottoms |
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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.
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.
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.
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