John Lansing

Triple-Top Signal Points to Downtrend

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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 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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