Technical analysis is a method to forecast the future price movements of security by studying its price history. A topping formation pattern shows that the growth of a security has reached its climax, and now it will enter into a stage of decline. Sometimes, this could be a phase followed by a period of stability before the next growth cycle.
Types of Topping Formations
Head and Shoulders Top
This represents continuously declining prices following two distinct downward trend reversals with higher lows with volume drying up at each peak or resistance level. The neckline represents an area where buyers are entering the market in large quantities. When the prices fall below neckline support, it indicates that sellers have finally taken over control of the market.
A head and shoulders top reversed is seen as a bullish reversal pattern.
Double Top
It shows two distinct peaks that are approximately at the same price level with higher lows in between. The neckline represents an area where buyers are entering the market in increasing numbers, pushing prices to new highs on each rally. When prices fall below neckline support, it indicates that sellers have finally taken over control of the market.
A double top reversal is seen as a bearish reversal pattern.
Triple Top
It shows three distinct peaks at approximately the same price level with lower highs in between. The neckline represents an area where buyers enter the market in large quantities, pushing prices to new highs on each rally. When prices fall below neckline support, it indicates that sellers have finally taken over control of the market.
A triple top reversal is seen as a bearish reversal pattern.
Rectangle Top
It shows five distinct peaks, with two contained within a box and three on either side, separated by lower highs. The double highs indicate that demand is not strong enough to push prices above resistance. The double highs show an inability to break out from this stage, while the lower lows in between indicate increasing selling activity. It happens when there is a period of consolidation after an extended advance or decline. When price breaks below the bottom horizontal line of the rectangle pattern, this indicates sellers have won control, and prices will generally trend downward from here on.
Ascending Triangle Top
This bullish pattern has a similar set-up as a rectangle topped chart except that the space between peaks and troughs is getting narrower, with each peak being lower than the one before. The top of this triangle, also known as the resistance line, represents an area where buyers are entering the market in large quantities pushing prices to new highs on each rally upward. When price breaks below the bottom horizontal line of the ascending triangle, this indicates sellers have won control, and prices will generally trend downward from here on. If volume stays firm, then the price should continue upward until reaching resistance again at the apex of the triangle. The buy signal comes with a break above resistance, provided there is strong follow-through on higher daily closes.
Ascending Triangle Reversed
This is a bearish pattern with a similar set-up as an ascending triangle topped chart, except that the space between peaks and troughs is getting narrower, with each peak being lower than the one before. This occurs when there is a period of consolidation after an extended advance or decline. When price breaks below the bottom horizontal line of the ascending triangle, this indicates sellers have won control, and prices will generally trend downward from here on. If volume stays firm, then the price should continue downward until reaching support again at the apex of the triangle. The sell signal comes with a break below support provided there is strong follow-through on lower daily closes.
Type 2 Flat Top
It shows three higher highs separated by two distinct lower lows. The highs are not at the same level, and the two lows are approximately equal. This is a good sign that demand has turned upwards or that supply has dried up enough for demand to turn upwards.
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