Adam and Eve Tops
Stock charts print many unique
topping formations. Some classics, such as the
Descending Triangle, can be understood and traded with
very little effort. But the emotional crowd also generates many
undependable patterns as greed slowly evolves into mindless
fear. Complex Rising Wedges will defy a
technician's best effort at prediction while the odd
Diamond pattern burns trading capital swinging randomly
back and forth.
| Skilled traders avoid these
fruitless positions and only seek profit where the odds strongly
favor their play. They first locate a common feature
found in most topping reversals: price draws at least one lower
high within the broad congestion before violating a major
uptrend. This common double top mechanism becomes the focus for
their trade entry. From this well-marked signpost, they follow
price to a natural breaking point and enter when violated.
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| This simple Adam & Eve Top
provides traders with frequent high profit short sales
opportunities. Note this classic pattern in Quantum's
chart. Price never drew a third high before entering a
significant bear market. Successful A&E short sales can be
entered on the first violation of the reaction low, regardless
of an underlying trend. However, use tight stops to avoid
"turtle reversals". These occur when sharp short covering
rallies suddenly erupt right after the gunning of stops below a
violation point.
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Do you recall the Adam & Eve Bottom,
featured earlier in this column? This unique
formation consists of a spiking first bottom, followed
by a rounded second one. Flip the pattern over and
you'll find a highly predictive structure for trading
these topping reversals.
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Each uptrend generates positive
sentiment that must be overcome through the topping structure.
A&E tops represent an efficient bar structure to accomplish this
task. The violent reversal of Adam first awakens fear. Then the
slow dome of Eve absorbs the remaining bull impulse while
dissipating volatility needed to resume a rally. As the dome
completes, price moves swiftly to lower levels without
substantial resistance.
Observant technicians will recognize
the mechanics of Descending Triangles and Adam & Eve
formations in more complex reversals. The vast
majority of tops contain some characteristics of these familiar
patterns. Crowd enthusiasm must be eliminated for a decline to
proceed. Through the repeated failure of price to achieve new
highs, buying interest eventually recedes. Then the market can
finally drop from its own weight.
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| Quantum's 1997 multi-year
high breaks down in a dramatic Adam and Eve Top.
Look for both volume and volatility readings to decline
gradually through the formation of the second rounded
high. Most times, this "Eve" consumes more price bars
than the "Adam" that precedes it. |
