The triple top is a reversal chart pattern featuring three peaks at the same level, making it different from the head and shoulders, which has a more towering middle peak compared to the other two. A breakout from the support follows the three peaks. The area of the peaks is the resistance level in the pattern.
Before the three peaks emerge, the price experiences an uptrend. After the formation of the first peak, the price undergoes a swing lower. The peaks themselves are well spaced and are reasonably equal in height. The triple top development includes a decline in overall volume with occasional increases when the price reaches the high points. After the third peak, the volume expands during the drop and at the support level.
Confirmation of the triple top pattern happens when the support breaks. The support level is the lowest of the swing lows. The support now acts as a possible resistance level that is often tested with a reaction rally, a rally that stops before it reaches the point from where the decline started. The price target is the distance from the support line to the high points minus the support break.
A triple top reversal pattern usually takes three to six months to form. Throughout this development, the pattern can take the shape of a double top and other patterns as well. Traders also combine the triple top with other indicators, such as MACD, to confirm the bearish crossover after the final high.
Importance of the Triple Top
A triple top pattern indicates that the price action is unable to break through the upper peaks. The technical analysis will show that after multiple failed attempts to trade higher, the stock or index is unable to find buyers at the top end of the range. Here traders interpret the price to be overvalued, and selling pressure begins.
Technical traders will understand that the price is unable to rise above the resistance level and therefore have no business holding onto the stock. Investors who currently hold the underlying begin selling, new traders also jump in and short the stock, this ultimately pushes the price down below the lower trendline. Here, the stock breaks down, fueling the selloff.
Attributes
- Pattern type: Reversal
- Indication: Bearish
- Breakout confirmation: The confirmation for this pattern is when there is a close below the lower trendline drawn horizontally across the intervening low with above-average volume.
- Measuring: Take the distance between the low to the top of the two highs, then subtract that amount from the breakout level.
- Volume: The volume increases during the formation and then increases below the bottom support level.
Conclusion
The triple top is a bearish reversal chart pattern that signals the sellers are coming in the push the stock lower. It is a good indication when it is time to get out of the stock or jump on the bandwagon and sell the stock short. Traders should also combine other technical indicators to confirm the triple top pattern and not make a move until the pattern is confirmed. To learn more about stock chart patterns and how to take advantage of technical analysis to the fullest, be sure to check out our entire library of predictable chart patterns. These include comprehensive descriptions and images so that you can recognize important chart patterns scenarios and become a better trader.
