TOP AND BOTTOM
Many statements discussed in the pages, dedicated to the
model “Head and Shoulders”, are applied to the rest models of the trend
reversal. The model of “Triple Top or bottom” is encountered more rarely, than
"Head and Shoulders", and is just a version of it. The main
difference consists in the fact that all three peaks (or three falls) of a
triple top or bottom respectively are located almost at the same level. In case
if there are two peaks (or falls), they form a double top (or double bottom)
respectively. Technical analysts often have different opinions regarding the
type of a model formed: "Head and Shoulders" or “Triple top”, Triple
Top or Double one. This argument is rather of academic character, because in
the core both of the models are virtually the same.
Once a famous satirist told during his concert that a woman
asked him in her letter why chicken cubes are called cubes, because they are
parallelepipeds. Doesn’t`t it sound funny? Here the situation is quite similar:
our challenge is to understand the core of the price models and the way we can
gain profit with them. The name does not change the core.
We will consider the features of these models with the
example of the Double Top, since this reversal model is encountered most often
– Fig.1. With an ascending trend, at first the prices establish a new maximum
(point А); it is usually accompanied with trade volume increase. Then an
intermediate fall (point B) comes, and the volume falls as well. So far
everything goes smoothly, like at a normal trend towards a rise. However, in
the course of the next rise (point С) the prices do not manage to overcome the
level of the previous peak A for values at the closing moment, and they start
falling. As a result, we have the potential model of the “double top”. Why
“potential”? Because, like in case of all reversal models, the reversal is not
completed until the closing prices do not cross the previous support level,
which passes through point В. Until it happens, it is early to speak about the
trend reversal. It may be just a consolidation horizontal phase, after which
the previous trend will continue developing.
Fig. 1. “Double Top”
Ideally this model of the Top should have two clearly
outlined peaks locating approximately at the same level. As a rule, the first
peak is distinguished with large trade volume, the second one has less volume.
A vigorous breakthrough of falling level B between the two peaks by the prices
allows making the conclusion about the model completion with the volume
increase and, consequently, about the trend reversal towards decrease. Back
movement of the prices towards the breakthrough level is not excluded, after
which the descending trend development will continue.
Please, remember the core of the models “Base and Top”:
1. Movement stop
2. Reversal
The way of measurement of the “Double Top” is based on its
height– width of the channel, formed by the model. This distance is calculated
downwards from the breakthrough point of falling level B. In addition, like in
a case with formation of “Head and Shoulders” model, confirmation of the
oncoming reversal is received when divergence with the price in oscillators
occurs– Fig. 1.
Fig. 2. “Double bottom”
The real situation in the market very often forms some
deviation from the ideal scheme, and reversal models are not an exception.
Firstly, it may happen that both of the peaks do not locate strictly at the
same level. In the first variant let us imagine that the second peak does not
reach the first one – is the model top or not? Let us come to this question
logically. The movement stop occurs in practice, therefore it is quite logical
to consider such a model as a top. In the second variant let us imagine that
the second maximum is higher than the first one: is it a top or not? In this
case, let us apply the price filter: the second peak closing price. If the
candle shadow exceeded the first maximum, but the closing price (candle body)
could not fix higher, it implies that a stop has occurred. If the candle body
in the second peak exceeds the level of the first peak, such formation is not
regarded as a top, on the contrary, in this case a breakthrough of the
resistance level occurs. Note that in Fig.2 point C is a little lower than
point A. However, as this is just the candle shadow, but the closing price has
remained above the level of the previous minimum, we make the conclusion that
it is a chance tick, but not a breakthrough of the previous support level.
Fig. 3 “Bull Trap”
Some element of chance is always present in the market. It
is quite likely that in the last segment or the last wave of quite bull market
prices will set a new maximum, then start movement in the opposite direction.
In this case, the last breakthrough upwards will be “bull trap”. However, it is
not worth giving way to discourage. Most of technical signals of the trend are
surely quite reliable, or else the analysis methods, based on following the
trend, just could not exist. Note that in Fig. 3 at point B the price
apparently exceeds the previous maximum level, formed at point A. It is an
obvious signal about the resistance level breakthrough, but not formation about
the model of “Double Top”.
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