PurelyTechnical

INTRODUCTION:

The Triple Top is a bearish reversal chart pattern. It is considered a variation of the Head & Shoulders Top. The difference in this case is that each of the three peaks is formed at approximately the same level. Like its more famous counterpart, the Triple Top typically takes around 3-6 months to form and has bearish implications that are just as significant.

Intuitively, the Triple Top can be thought of as a process of "distribution", wherein the 'smart money' is selling into market strength as price oscillates through a series of peaks and troughs, until support is broken and a new downtrend begins in full force.

FORMATION

Prior Trend

In the lead-up to a topping formation that would later turn out to be a triple top, the chartist witnesses a major uptrend, wherein price is showing a series of higher lows and higher highs.

The market rallies strongly until it forms a minor peak (A) and then starts a reaction descent. This decline does not last for long and is arrested once the market finds a footing on the uptrend line (at X) and then starts to rally once again after forming a trough. Upon rallying to the level of the previous high, however, price meets staunch resistance.

Unable to move past that resistance, the market puts in another minor peak (B) and is then pushed downwards to eventually break the rising trendline, thus officially ending the prior uptrend.

Note that at this stage it is still not clear whether the new trend is going to be one of sideways consolidation or, indeed, of descent. Accordingly, traders might now look to cover long positions or place stops just below recent support (X).

Three Peaks

After the breaking of the uptrend, prices decline a little further but quickly find support at or near the level of the first intervening trough and then rally once again leaving behind another trough (at Y). The rally out of the second intervening trough attempts to push prices past resistance provided by the first two peaks.

However, resistance proves impenetrable as the market puts in another peak (C) and starts to decline yet again. At this point the technician, who by now has probably liquidated long positions, is on full alert for a bearish reversal.

Support Break and Return Move

After the decline from the third peak, the technician is still not certain as to whether the market is trading within a continuation pattern (such as a bullish rectangle) or a bearish reversal pattern. However, that question is quickly answered when price breaks the support line - also known as the "neckline" - most likely in a surge of trading activity.

This breakdown is a confirmation that the market has changed trend and is now ready to make a move downwards. These developments serve as a cue for the trader to initiate a short position.

While the triple top itself is a rare pattern, a return move is often witnessed when one does in fact show up on the charts. Therefore, a trader who misses the breakout might often have a chance to enter a short position when price retests the broken support line.

OTHER SIGNIFICANT ASPECTS

Volume

The volume trend witnessed during a triple top formation tends to mimic that seen during a head and shoulders top. Volume generally declines as the pattern wears on, often with each peak experiencing progressively lesser trading action. The intuition here is that traders become less and less interested in buying at each attempt at making a new high.

Additionally, trading volume is typically light at each of the intervening troughs, which ambiguously tends to reflect a disinterest in selling (or adding to) holdings at those slightly lower levels. This lack of buying and selling interest means that the market finds itself meandering between peaks and troughs until either resistance or support is broken.

A breaking of support that comes together with a surge in trading activity is seen as confirmation of the potential bearish reversal, and is likely an opportunity to initiate short positions. Any return move that develops usually does so on low volume and is followed by a bout of selling that puts the trend reversal firmly in place.

Duration

A triple top takes several – usually 3 to 6 – months to form, starting with the formation of the first peak and ending in the breaking of support after the third peak has been put in place.

VARIATIONS IN FORM

While the “textbook perfect” triple top might possess peaks that all line up with each other and intervening troughs that form at the same price level (a certain distance below that of the peaks), a perfect formation rarely occurs in real market situations. Often, the trough seen between the first pair of peaks will be at a level lower, or higher, than the trough between the second pair.

As a result, a triple top might have more than one support line. When there is more than one support line, i.e. when the intervening troughs are formed at different levels, the generally accepted practice is to view the level of the lowest trough as the significant support level (which will serve as the neckline for the pattern). 

Other variations in form include hybrid patterns (such as a hybrid double/triple top, wherein all the peaks do not line up with each other) and multiple-peaked tops (commonly referred to as triple tops).

SETTING UP THE TRADE & FINDING A PROFIT OBJECTIVE

While some technicians would typically close long positions on the breaking of the uptrend, or upon a failure to break above resistance at the third peak, a few others might stay long and place stops just below the support line. Aggressive traders, however, might look to go short as soon as there is a breaking of support or perhaps during any return move.

The price objective for short positions initiated as a result of a triple top sell signal is arrived at by using the vertical distance or height method. Herein, the trader measures the vertical distance (in terms of absolute points or percentage points) between resistance (D) and support (E) and then projects that distance downward from the level of the breakout (F), to arrive at a target for the trade. Once prices start to decline, short positions are protected by placing stops just above the level of the broken support line.

EXAMPLE

NEM displayed a Triple Top over a period of four months in early-1996.

The stock was in a sharp uptrend that had begun several months earlier.

A (first) peak formed at 58.3 in early-Feb ’96, after which the stock declined to form a wide trough at 51.5, between mid-Feb and mid-Mar.

Later in March, the stock ran back up to 58.3 and formed a second peak before being knocked down once again. It then formed a narrow second trough in mid-Apr. Notice that the second trough did not form at a level as low as the first.

Then a third peak formed at 58.3 through May.

Notice how volume decreased at each peak, and was generally low during the intervening troughs. This is the typical case.

The failure to break above resistance in late-May led to a bout of selling that provided a breaking of support at 51.5, thus confirming the triple top formation.

After a further decline of a couple of points, the stock made a return move in early-July.

The target - arrived at by projecting the “height” of the pattern (58.3-51.5= 6.8 pts ) downwards from the level of the neckline (51.5) - was 44.7. This price was attained by mid-July, barely 7 weeks after the breakout.