Reversal patterns are very useful to chartists in anticipating a change in the prevalent trend. We took a peek at what reversal patterns are and the intricacies of the head and shoulder pattern in our last tech school. We move on to triple top reversal patterns this week.
As the name suggests, triple top pattern consists of three peaks at roughly the same level with two intervening troughs. The volume tends to decrease with each consecutive trough and it expands while the pattern breaks below the baseline. The measuring implication for this pattern is similar to that of the head and shoulder pattern. The move following the break-out will be at least the distance between the highest point in the pattern and the baseline.
The triple-top pattern is confirmed only after the price moves conclusively below the baseline connecting the two intervening troughs. The psychology behind the pattern is that as the up-trend progresses, investors get nervous about an impending reversal. However, in the reaction following the first peak, many investors who could not buy the stock at lower levels, rush in to buy. But in the down move after the second peak, there are fewer takers for the stock and the third peak is formed with the lowest volumes.
Repeated attempts to surpass a certain resistance, has a demoralising effect on the investor morale and there is an exodus from the stock that is reflected in the expanding volumes on the break-out.
Let us consider the real-life example of the triple top formation in the weekly chart of Bajaj Holdings between May 2006 and February 2007. In this instance, the stock made a triple top around Rs 1,170. Though there was an intra-week move above this level in May 2006, it ended the week below the level. In real-life instances the peaks rarely form at precisely the same level. It would be best to give a leeway of 2-5 per cent difference between the three peaks. The stock re-tested the baseline following the break-down before finally heading lower. The difference between the baseline (Rs 900) and the peak (Rs 1,177) was Rs 277. Deducting this number from the baseline, we get the projected target for the pattern at Rs 623. This target was achieved by March 2008.
Another example of triple top pattern is displayed in the daily chart of Crompton Greaves shown above