Adam & Eve Tops
Anticipating A Selloff
Andrews Pitch Fork
Bilateral Trade Setups
Comp. Relative Strength
Cup With Handle
Exploring Market Physics
Dow and Elliot Waves
False Breakouts and Whipsaws
Flags and Pennants
5 Fibonacci Tricks
Fun With Fibonacci
Greed and Fear
Low Down On Bottoms
Head and Shoulders
Morning Gap Strategies
Moving Average Crossovers
Pitfalls Of Selling Short
Playing Failed Patterns
Point and Figure
Pull Back Day Trading
Surviving Bear Markets
The Big W
Tale Of The Tape
The Gap Primer
Trading Execution Zone
Trend Direction and Timing
The Profitable Trader
Wedges and Volume
20 Golden Rules
20 Rules For Trade Execution
20 Rules To Stop Losing Money
5 Wave Decline
3-D Trade Execution
|No chart pattern better illustrates this slow
evolution from bull market to bear decline than the
Descending Triangle. Within this simple structure, the
trader examines how life drains slowly from a dynamic
uptrend. Variations of this destructive formation
precede more breakdowns than any other reversal. And
they can be found doing their dirty deeds in all time
frames and all markets.
|| But why does it work with such deadly accuracy? Most
traders don't understand how or why patterns predict
outcomes. Some even believe these important tools rely
on mysticism or convenient curve fitting. The simple
truth is more powerful: congestion patterns reflect the
impact of crowd psychology on changes in price and
Shock and fear quickly follow the first reversal marking
the triangle's major top. But many shareholders remain
true believers and expect their profits will return when
selling dissipates. They continue to hold as hope slowly
replaces better judgement.
| The selloff then carries
further than anticipated and their discomfort increases.
Just as pain begins to escalate, the correction suddenly
ends and the stock firmly bounces.
For many longs, this late buying reinforces a dangerous
bias that they were right all along. Renewed confidence
even prompts some to add to positions. But smarter
players have a change of heart and view this new rally
as a chance to get out. As they quietly exit, the strong
bounce loses momentum and the stock once again turns and
fails. Those still riding the issue now watch the low of
the first reversal with much apprehension.
Prior countertrend lows present trading opportunities
for those familiar with double bottom behavior. As price
descends a second time toward the emotional barrier of
the last low, traders step in looking for a good DB
play. Price again stabilizes near that prior value,
encouraging new investors (with very bad timing) to
enter final long positions.
By this time, the stock's bullish momentum has slowly
drained through the criss-cross price swings. Relative
strength indicators now signal sharp negative
divergences as price continues to hold up through this
sideways action. Momentum indicators roll over and
Bollinger Bands contract as price range narrows.
The double bottom appears to hold as a weak rally draws
a third high. But this final bounce fades and traders
exit quickly. Shorts now smell blood and enter initial
positions. Fear increases and stops build just under the
double low shelf. Price returns for one final test as
negative sentiment expands sharply. Often, price and
volatility then contract right at the break point.
|SEEK sketches a
perfect Descending Triangle reversal and
breakdown following its 1998 rally. Sharp,
parabolic rallies often set the stage for
dramatic topping formations. Note how the
triangle is also a variation of the Adam and Eve
The bulls must hold this line. However, odds have now
shifted firmly against them. Recognizing the imminent
breakdown, traders use all upticks to enter new short
sales and counter any weak bull response. Finally, the
last positive sentiment dies and horizontal support
violates, triggering the stops. Price spirals downward
in a substantial price decline.
Stock charts print many unique topping formations. Some
classics 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
Flip over the Adam and Eve bottom and you'll find a
highly predictive structure for trading reversals. This
Adam and Eve Top provides traders with frequent high
profit short sales opportunities. Enter shorts on the
first violation of the reaction low, but 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.
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.
The slow dome of Eve absorbs the remaining bull impulse
while dissipating the volatility needed to resume a
rally. As the dome completes, price moves swiftly to
lower levels without substantial resistance.
Observant traders recognize the mechanics of Descending
Triangles and Adam & Eve formations in more complex
reversals. The vast majority of tops contain
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.