Stock charts print different topping formations. Some are classics, like the Descending Triangle, which can be understood and traded with little effort. However the emotional crowd additionally generates many undependable patterns while greed slowly evolves into mindless fear. Complex Rising Wedges will challenge a technician’s best effort at prediction while the unusual Diamond pattern burns trading capital swinging randomly back and forth.
Skilled traders refrain from these fruitless positions and will only look for profits where the odds strongly favor their play. First they’ll locate a common feature discovered in most topping reversals. Price draws at least one lower high within the broad congestion prior to violating a major uptrend. This common double top mechanism will become the focus for their trade entry. From this precise signpost it will follow the price to a natural breaking point and enter when violated.
Remember the Adam & Eve Bottom discussed earlier. This unique formation consists of a spiking first bottom, followed by a rounded second one. Flip the pattern around and you will see a highly predictive structure for trading these topping reversals.
This easy Adam & Eve Top gives traders frequent high profit short sales opportunities. Take note of this classic pattern in Quantum’s chart. The price never drew a third high prior to entering a significant bear market.
Successful Adam & Eve short sales may be entered on the first violation of the reaction low, regardless of an underlying trend. Use tight stops to prevent “turtle reversals.” They happen when sharp shorts covering rallies unexpectedly erupt right after the gunning of stops below a violation point.
Every uptrend produces positive sentiment that has to overcome the topping structure. Adam & Eve tops represents an efficient bar structure to succeed in this task. The violent reversal of Adam first awakens fear. Then the slow dome of Eve devours the remaining bull impulse while dissipating volatility needed to resume a rally. As the dome finishes, price moves swiftly to lower levels without substantial resistance.
Observant technicians recognize the mechanics of Descending Triangles and Adam & Eve formations in a lot of complex reversals. The vast majority of tops contain some characteristics of these similar patterns. Crowd enthusiasm will be eliminated for a decline to proceed. Through the repetitive failure of price to achieve new highs, buying interest eventually recedes. Then the market can eventually drop from its own weight.
Double Top Breakdown
Quantum’s 1997 multi-year high breaks down in a dramatic Adam and Eve Top. Pay attention to both volume and volatility readings to decline gradually through the formation of the second rounded high. Often, this “Eve” consumes more price bars than the “Adam” that precedes it.