Section 8:
Bearish Reversal Patterns
Triple Top
Definition:
A triple top occurs within the context of an existing bullish trend. It starts when a stock reaches a high from which it sharply reverses lower. The stock then reaches a low from which it rebounds. The stock rises up to the previous high and reverses lower for a second time, forming two equal highs. The stock then reverses back down to its recent low and bounces once more back up to its recent highs. The pattern concludes after the stock rolls over for a third time from its highs. These three highs are connected to form a horizontal resistance level. The support level is defined by the lows formed after the rebound attempts.
Nuance:
Triple tops occur less frequently than double tops. But when triple tops do form, they provide very precise entry points and risk management levels. Triple tops can form over very short and long periods of time.
Triple tops can go on and become quadruple top if the same horizontal support level is retested. The patterns can continue indefinitely, but the more often a resistance level is tested the weaker it becomes. Keep as much in mind when trading triple tops that don’t immediately reverse lower.
Application:
A triple top is confirmed once the currency pair breaks below the horizontal support level. Entry points can be taken upon the breakdown or after waiting for a retest or previous support and then taking action on the reversal. A triple top is rejected if the stock breaks above horizontal resistance.
Figure 8.3
Example:
Shares of Chicos Fashion (CHS) formed a triple top in a relatively short period of time as shown in Figure 8.3. The stock traded up to but rolled over from $27.75 on three separate occasions over the course of two months. Meanwhile, horizontal support formed at the $24 level. After rolling over from the $24 horizontal resistance level for the third time, CHS broke below the $24 level and embarked on a new bearish trend.