the stock shown in Figure 42.6 well before the triple bottom appeared. Even though the stock climbed from his $14 purchase pricenearly a year before, seeing the triple bottom thrilled him. He believed that theformation would act as a consolidation of the upward trend. He was right. Aday after the stock pierced the confirmation line, he bought more, receiving afill at 27. His analysis suggested prices would rise to SO'A, fulfilling the measurerule. Russell believed the stock could do better and secretly he hoped for more.After the purchase he waited. As the stock climbed, he logged into hisbroker at the end of the trading session each day and plotted the daily pricechange. Over time, he was able to draw an up trendline that skirted the dailylows as the price ascended (see Figure 42.6).He drew a second trendline from the third bottom low upward (notshown). As he extended the two lines, they intersected on July 20. On that day,prices closed below both trendlines. Time to sell.That evening, Russell phoned his broker and placed a market order to sellhis holdings in the company the next day. The following day word came thathis shares traded at 30'/4. Much to his surprise, he met the measure rule prediction exactly.
He knew that he had done the rightpenetration is not something to take lightly.was wrong. The stock turned around andcame that earnings would be 40% abovegapping up (breakaway gap), eventually reaafter reaching the high, the stock was tradinRussell left a lot on the table gettingcoast to 40, but the feel of green in his pockthe stock down to 16.
Identification Guidelines
43Triple Tops
591
optimistic view, there is an 85% chance that prices will decline by more than5%. The average loss is 21% with a likely decline of only 10%. So, if you aredepending on the triple top formation to score an outsized decline, the probabilities are against you.The pullback rate at 84% is one of the highest I have seen. This meansyou will have another opportunity to either sell your holdings before the real
decline begins or add to your short position. It suggests some hesitancy forprices to break away.Before you place a trade in a security showing a triple top, think about a
short decline. Only 47% of the formations meet their price targets, whereasreliable readings are above 80%. It is comparatively unlikely that prices willdecline by more than the formation height.One surprising finding about triple tops is when the price of the highesthigh in the third top is above the second top. Formations with this configuration have losses of 22% versus 17%. The differences are statistically significant
meaning that die results likely are not due to chance.
TourRESULTS SNAPSHOT
Appearance
Three distinct minor highs at about the same pricelevel
Reversal or consolidation
Short-term (up to 3 months) bearish reversal
Failure rate
15%
Average decline
21%, with most likely decline being 10 %
Volume trend
Downward
Fullbacks
84%
Percentage meetingpredicted price target
47%
Surprising finding
See also
A formation with a third top above the second oneperforms better, with an average loss of 22% versus17%.Broadening Formations, Right-Angled andDescending; Broadening Tops; Broadening Wedges,Descending; Head-and-Shoulders Tops; Head-andShoulders Tops, Complex; Triangles, Ascending
The failure rate at 15% for triple tops approaches the 20% maximum*! consider permissible for reliable formations. Still, there are a number of formations that perform worse, so there is no reason for concern. To take a more
590
Figure 43.1 shows a triple top on the daily scale. The figure reminds me of aroller coaster as prices climb the first hill. Then it is over the top to glide downthe slope and up to the next high and over the third one as well. After the finalhigh, prices decline for the intermediate term pausing at the confirmationpoult while deciding which route to take.
A head-and-shoulders top forms, warning investors of further declines.Prices pull back to the triple top confirmation point, forming the left shoulder,peak at the head, and rise to form the right shoulder. Prices piercing die neckline seal the fate of the formation. Prices tumble in a straight-line fashion until
they reach a low of 37, a decline from the triple top high of 50.The three peaks of the triple top form at about 50 and have two valleysbetween them. The lowest valley low marks the confirmation point, the levelto which prices must decline to confirm the validity of the formation. After
confirmation, prices usually pull back to the confirmation point before crashing down further.
Identification GuidelinesTable 43.1 outlines identification guidelines for triple tops. When searchingfor a triple top or verifying that the three bumps you are looking at on a pricechart belong to the formation, look at the highest high in each peak. The peaksshould be near one another in price. A center peak that towers above the other
Tenneco Inc. (Auto Parts (Replacement), NYSE, TEN)
Identification Guidelines
593
two suggests the pattern is a head-and-shoulders top. When the tops consistently inch upward, the activity suggests a broadening top. While looking atthe three peaks, do not ignore the lows. The formation may be a right-angleddescending broadening top or even a descending broadening wedge if the threepeaks are moving down slightly in price.In the case of a right-angled broadening top, you can probably makemoney on the triple top formation even before the broadening top breaksout. At least with a broadening formation, you can anticipate when it will betime to close out your position (do so when prices approach the lower, downsloping, trendline).The three peaks in a triple top usually are sharp and pointed looking, withrounded-appearing valleys in between. There are wide variations in this pattern, so do not be too critical. Make sure the three well-separated peaks are notpart of the same congestion pattern. Each top should be a part of its own minorhigh, a distinct peak that towers above the surrounding price landscape.Figure 43.1 Triple top on the daily scale. A triple top has three peaks and a pullback usually follows. A head-and-shoulders top forms at the confirmation point signaling further weakness.
The overall volume trend is usually downward and lackluster, but this
varies from formation to formation. Volume on the three peaks, especially thefirst one, is higher than in the valleys.
To see what a triple top looks like, examine Figure 43.2. The three peaksare pointed, well separated, and distinct. The three minor highs are obviousand that is important in any formation. If other investors do not recognize aTable 43.1Identification Characteristics of Triple TopsCharacteristic
Discussion
Three large distinct tops
Look for three minor highs, well separated and distinct.The tall peaks are often sharp spikes that contrast withmore rounding-appearing valleys.The price variation among the three tops is minor. Thecenter top should not be significantly above the other two,otherwise it is a head-and-shoulders top. There is atendency for smaller triple tops to be one of thebroadening family of chart patterns, especially the rightangle variety, so pay attention to the price lows, too.The volume trend is usually downward but may be hard toread. Often the volume pattern is flat except near each ofthe three peaks. The first peak often has the highestvolume.Prices must decline below the lowest low in the formation(the confirmation point) or it is not a triple top.Since triple tops are usually large price formations, look atthe weekly chart to help identify the longer variety.
Same price
Downward volume trend
Confirmation pointWeekly chart
Georgia Pacific Corp. (Paper & Forest Products, NYSE, CP)
|an92
Feb
Mar
May
jun
)ul
Figure 43.2 This triple top shows three distinct widely spaced tops at nearly thesame price level.
592
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Triple Tops
chart pattern for what it is, they will not try to take advantage of it. If they donot buy or sell appropriately, the pattern will fail. Chart patterns are a selffulfilling prophecy that depend on the crowd behaving the same way.
All three peaks are at about the same price level with the center peak a bitrecessed from the other two. This is common as quite a number (31% orhigher if ties are allowed) of triple tops have a lower center peak.The receding volume trend is clear in the figure with the first peak witnessing the highest volume of the three.An interesting development in this formation is a trendline drawn belowthe lows (not shown but it connects points A and B on the chart). With anothertrendline drawn horizontally across the three tops, the formation takes on theappearance of a right-angled descending broadening top. In many triple tops,
the broadening formation also appears. This does not diminish the validity ofthe triple top, it just makes both formations easier to trade (because you canbuy or sell at the trendlines and take advantage of partial rises or declines).Figure 43.3 shows a triple top on the weekly chart. Even though the average triple top sports a 21% decline, prices occasionally fall much further. The
Focus on Failures
595
have been better than riding the stock all the way up and all the way backdown. Do not laugh; I have done it myself but not with this stock. It is probably a mistake we all have made at one time or another and hope never to makeagain. Unless you use stops, you will probably make it again. You will watch allyour profits evaporate as a stock declines while you continue hoping it will turn
around. Then, just after you get disgusted enough to sell, prices bottom andstart recovering.
Focus on FailuresAs mentioned earlier, the failure rate of triple tops at 15% is comfortably belowthe 20% maximum that I consider reliable formations to maintain. I classify afailure of a triple top to be when prices reach the confirmation point and continue moving down by less than 5% before turning around and heading meaningfully higher. This is a key point. Prices must decline to the confirmation
point, the lowest low reached in the formation. If prices do not decline to that
chart is an example of this. You can see that the triple top marks the peak in the
level, then the three-bump formation is not a triple top—it is just a collection of
stock. From the high of 3215/i6, the stock plummets to 43/4, a stomach-churningdecline of 86% in 2 years.The chart also suggests some lessons. Sometimes the buy-and-hold strat-
minor highs (or, perhaps, some other formation).Since a downside breakout is an identification prerequisite, that leavesonly 5% failures. Figure 43.4 shows a typical example of a 5% failure. The three
egy does not work. Whether you sold a bit early or a bit late, anything would
92
F M A M
| | A S O N D 9 3 F M A M | ) A S O N D 9 4 F M A M J ] A S O N D
Figure 43.3 Triple top reversal on the weekly scale. The triple top marks the highpoint for the stock.
Figure 43.4 A triple top failure. This is an example of a 5% failure where pricesfail to continue moving down by more than 5% before turning around. Strongindustry trends were instrumental in turning around the stock.
596
Table 43.2
Triple Tops
tops are distinct minor highs that form after a 2-month spurt upward. It is notsurprising that the stock needs a rest and decides to retrace some of its gains—a common occurrence. From the high, the stock backtracks about four pointsbefore moving up again. The lowest low is just a smidgen below the confirmation point, which validates the formation, before prices begin climbing again.Had you sold this stock short at the confirmation point of 201/4, you shouldhave covered your trade once prices climbed above the highest high in the formation, in this case 237/8. This would have kept losses to a rather large 18%, butthat is certainly better than hoping for a decline while watching it rise to 33!It is often difficult to determine exactly why a stock fails to perform asexpected. Often the fundamentals are the key. In this case, the oil-field servicessector was improving due to an increase in exploration activity and deep waterdrilling. In late January, die Federal Reserve cut two key interest rates by J/4percent, giving hope that the health of the overall economy would improve.On the technical front, if you draw trendlines along the three tops and the
General Statistics for Triple TopsDescription
Statistic
Number of formations in 500 stocks from1991 to 1996
122
Reversal or consolidation
25 consolidations, 97 reversals
Failure rate
Average decline of successful formations
18 or 15%21%
Most likely decline
10%
Of those succeeding, number meeting orexceeding price target (measure rule)
49 or 47%
Average formation length
4 months (110 days)
Days between tops
1 & 2, 56 days; 2 & 3, 55 days
Formation end to downside breakout
40 days
PullbacksAverage time to pullback completion
8 days
103 or 84%
For successful formations, days to ultimate low
3.5 months (101 days)
minor lows, the formation takes on the appearance of a descending broadeningwedge since the three tops are at consecutively lower prices. With the wedge,
Percentage of breakouts occurring near 12-monthlow (L), center (C), or high (H)
L.48%, C42%, H11%
it is difficult to predict in which direction the breakout will occur. The fundamentals suggest the breakout will be upward, and that is exactly what happens.
Percentage decline for each 12-monthlookback period
LI 8%, C22%, H24%
The formation serves as a resting place for the stock as it gathers strength forthe next up leg.
One could view the formation as the corrective phase of a measured moveup formation. The price prediction of the measured move fulfills quickly whenprices climb to 287/s in late April.
StatisticsTable 43.2 shows general statistics for triple tops. There are 122 formations in2,500 years of daily price data, making the formation a rare one, indeed. Mostact as reversals of the primary trend, meaning prices continue moving downafter reaching the confirmation point.The failure rate is 15%, below the maximum 20% that I consider reliable
formations to possess. For those formations that do not fail, prices decline byan average of 21%. Figure 43.5 shows that the most likely loss is 10%. I use afrequency distribution of losses to get a bead on how an investor is likely to dowith this formation. Of course, if you trade this formation often enough, your
results should approach the average, but the chart suggests losses from a tripletop are meager. Over half the formations have losses less than 20%.The measure rule helps predict the target price to which the stock shouldfall, at a minimum. Unfortunately, the 47% of formations that reach their targets are well short of the 80% benchmark. This poor showing is in concertwith the meager likely decline of 10%. A 10% loss is often not enough toexceed the formation height, which composes the measure rule. A more
10
15
20
25
30
35
40
45
50
>50
Percentage Loss
Figure 43.5 Frequency distribution of losses for triple tops. The 10% column, thecolumn with the highest frequency, represents the most likely decline. Over halfthe formations have losses less than 20%.
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Trading Tactics
Triple TopsTable 43.3Volume Statistics for Triple Tops
detailed explanation of the measure rule appears in the Trading Tactics sectionof this chapter.
The average formation length is about 4 months, long enough to appearon weekly charts. It is always a good idea to consider different time frameswhen viewing chart patterns and before making trading decisions.Like triple bottoms, the three tops in triple tops are about the same distance apart, in this case, 56 and 55 days between peaks. You can see from Figure 43.4 that equidistant peaks are not always the norm. Since the values areaverages, your results may vary.Before a three-peak formation becomes a triple top, prices must declinebelow the confirmation point (which is the lowest low in the formation). After
the third peak, it takes approximately 40 days to reach the confirmation point.Once prices pierce the confirmation point, they often pull back. On average,prices return to the confirmation point 84% of the time, taking just 8 days tomake the journey. As I was tabulating the results, I noticed several formationswith prices returning to the breakout point within a day or two before movingon. These quick returns contribute to the short average—the normal pullbackduration is about 11 days (for all tops, not just triple tops). From the confirmation or breakout point, it takes an additional 3'/2 months to reach the ultimate low, on average.Where in the yearly trading range do triple tops occur? The confirmation point usually rests in either the lowest third of the year range (48% of the time)or in the center third (42% of the time). Only 11% of the formations are in the
upper third. The reason for this is because the confirmation point (or breakoutpoint) is the lowest price in the formation; usually low enough to keep it outof the upper range. Mapping the performance over the yearly price range,we discover that the best performing formations have breakouts in the upper
Description
Statistic
Number showing downwardvolume trend
71 or 58%
Number of formations havingconsecutive receding volume oneach high
30 or 25%
Average decline of patterns withconsecutive receding volume oneach high
19%
Average decline of patterns withcenter top below volume of third top
23%
Average decline of patterns withcenter top above volume of third top
19%
Volume for breakout day and next 5 dayscompared with day before breakout
188%, 142%, 113%, 109%, 104%, 110%
Trading TacticsTable 43.4 outlines trading tactics starting with the measure rule. Use themeasure rule to help gauge how far prices will decline. Begin with computingthe height of the formation by subtracting the lowest low from the highesthigh reached in the chart pattern. Subtract the difference from the lowest lowto arrive at the predicted price. The predicted price serves as the expectedminimum move. Unfortunately, the measure rule for triple tops only works47% of the time, meaning that prices usually fall short of their targets.
third of the price range. Those in the top tier have declines averaging 24%,whereas those with breakouts in the lowest third of the yearly range result in
Table 43.4Trading Tactics for Triple Tops
declines of 18%.
Table 43.3 outlines volume statistics for triple tops. The declining volume trend appears only 58% of the time, not far above a coin toss (50%).Some say most triple tops have their highest volume on the first peak, diminished volume on the second, and even less volume on the third. I found thisreceding volume pattern to be true 25% of the time. Formations having thisvolume trend show losses averaging 19%, below the 21 % average for all tripletops. Comparing the volume at the middle peak with the last peak, those tripletops with volume lower on the center peak perform better with losses of 23%versus 19%. However, the differences are not statistically significant.Table 43.3 shows volume on the day of the breakout and up to a weeklater. When compared with the day before the breakout, the volume zooms to188% of the prior day's value then tapers off but remains high. The numberssuggest that once prices begin declining, momentum kicks in and helps propelprices lower.
599
Trading Tactic
Explanation
Measure rule
Compute the formation height by subtracting the lowestlow from highest high in the formation. Subtract the heightfrom the lowest low. The result is the expected minimumprice move.
Wait for confirmation
Since most three-top formations continue moving up,always wait for prices to decline below the lowest lowreached in the formation (the confirmation point). Onceconfirmed, prices usually continue moving lower.
Wait for pullback
The vast majority of triple top formations have pullbacks soif you miss the breakout, place or add to your short positiononce prices begin heading back down after the pullback.
Stop loss
For short positions, place a stop-loss order 1/s above thehighest high.
600
Triple Tops
Figure 43.6 makes the computation more clear. The lowest low of theformation occurs in late December when prices touch 173/4 briefly. The lastpeak harbors the highest high, 233/s. The difference, 55/8, is the formationheight. Subtract the height from the lowest low to arrive at a target priceof 12'/g (that is, 173/4 - 55/8). The figure shows prices reaching the target inmid-June.To better gauge the veracity of the result, you might look at the predicteddecline in percentage terms. From the confirmation point (the lowest low) of173/4, a 55/8 point decline is a loss of 32%. Figure 43.5 indicates that only 21%of the formations have losses over 30% (total the columns to the right of 30%).This suggests the chance of prices declining 32% is just one in five.In such a situation, and in most cases, you should look at support levels.Prices indicate support when they decline to a level then rebound. For example, the stock paused at the $16 level during July and August 1991 (not shownin Figure 43.6). This created the support level where the stock paused duringApril. Eventually, the stock worked through the support and tumbled to alower support level.In a roaring bull market, triple tops are often deceiving. Three pricebumps appear and prices do not decline to the confirmation point before soaring up and away. Thus, an important guideline in using triple tops is to wait forprices to fall below the confirmation point. Let me say this more definitively:
Figure 43.6 Triple top with unconfirmed double bottom. Danielle sold this stockbefore it reached the confirmation point then panicked at the unconfirmed double bottom. The stock eventually declined 56%. A descending scallop appearsbetween points A and B.
^
Sample Trade
601
You must wait for prices to fall below the confirmation point! If you decide to shorta stock making a triple top before the breakout, you might get lucky and watchprices tumble, but you are pushing your luck. In many cases, you will be settingyourself up for a loss.Fullbacks occur 84% of the time so if you miss the original breakout, youcan often place your trade during the pullback. Figure 43.6 shows a quick pullback occurring just 2 days after the breakout (I define a breakout as beingwhen prices close below the confirmation point). Just over a month later,investors have other opportunities (because prices rise to the breakout point) toadd to their position before the decline really begins.Should the trade go against you, place a stop-loss order '/g above the highest high. Since the three tops establish a resistance zone, prices will not hit thestop order until the resistance burns through. Sometimes a fourth peak willappear before prices move down.
Sample TradeDanielle is in charge of the family finances. To boost the return on their savings, she has taken to playing the stock market. Her first few trades were tentative but profitable. That gave her enough courage to undertake the tradefeatured in Figure 43.6.She is a brilliant, anxious, high-energy person who is comfortable takingmore risks than most people, so it came as no surprise when she jumped thegun and sold the stock short in early January. She simply did not want to waitfor prices to decline to the confirmation point. She explained that she wantedto maximize her gains and once prices were clearly heading down, she placedthe trade and received a fill at 2l'/2.The day after she shorted, the stock turned around and headed back up,making a fourth peak. Instead of covering her loss, she decided to hang on. Itwas a good call as prices flipped around and headed back down. Seven dayslater they reached the confirmation point of 173/4 but stalled.To Danielle, it looked as though the triple top became a multiple top andlater developed into an unconfirmed double bottom. Each day as pricesclimbed and her gains dwindled, she became more nervous holding onto hershort position.Eventually, emotions overcame her desire to hold the stock and she covered her position at 22'/4, suffering a minor loss of less than a point. A week orso after she bailed out, the stock was lower and it kept moving down.The stock paused at the $16 support level for over a month, then continued down. Eventually, the stock bottomed out at 93/s, comfortably below thepredicted price and well below her entry point at 21 '/2.Danielle made two mistakes with this trade. First she did not wait forprices to pierce the confirmation point. Had she waited, she would have seen
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Triple Tops
the false double bottom (it never confirmed as a true double bottom becauseprices did not rise above the highest high between the two bottoms).Furthermore, she was not patient enough for the trade to work out.When a trade goes against you, most times it is wise to quickly close out a position, especially if it is a short sale where losses can be unlimited. However,there are times, such as this trade, where a bit of patience is necessary alongwith a properly placed stop. Since the three peaks represent a resistance zone,it is wise to place a stop just above the highest high, then wait for prices to hitit. Had Danielle waited, the trade would have worked out better than heranalysis predicted.
44Wedges, Falling
R E S U L T S SNAPSHOTAppearance
A downward price trend bounded by twointersecting, down-sloping, trendlines
Reversal or consolidation
Short-term (up to 3 months) bullish consolidation
Failure rate
10%
Failure rate if waitedfor breakout
2%
Average rise
43 %, with most likely rise between 20% and 30%
Volume trend
Downward
Premature breakout
27%
Throwbacks
47%
Percentage meetingpredicted price target
88%
Surprising finding
The most powerful breakouts occur between 50%
and 80% of the distance to the apex (centered around65%).See also
Pennants
There are no outstanding surprises among the statistics shown in the ResultsSnapshot. The failure rate for falling wedges is low at 10%. This low failure
603
v
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Wedges, Falling
rate, coupled with an average rise of 43% and a likely rise of between 20% and30%, suggests it is a profitable formation to trade. However, it is also quite rare.The percentage of falling wedges meeting the predicted price target, at88%, is very high but then the benchmark is easy. Prices need only rise abovethe top of the formation to hit the target.My statistics show the most powerful breakouts occur at 50% to 80% ofthe distance to the apex (the center of this range being two-thirds of the wayto the apex). By powerful, I mean that stocks falling within the range showlarger gains, on average.
TourFigure 44.1 shows a falling wedge. Prices began declining in January 1992
from a high of 75K to the wedge start at 52'/4. Prices recovered somewhat—aretrace in a downtrend—rounded over and headed lower. Prices tagged a newlow in late July and bounced upward again. This time, the upward momentumdid not carry quite as far as before. Another up and down oscillation occurredduring mid-August just before prices finally reached a new low.If you draw a trendline along the bottom of the minor lows and anodieralong the tops, you see the familiar shape of a falling wedge. Falling wedges arerare formations that have price movements bounded by two down-slopingtrendlines. When drawn on the chart, the picture looks like a wedge tilteddownward.Delta Air Lines Inc. (Air Transport, NYSE, DAL)
Once prices break out upward, they rof the formation. Many times prices contgains.
Identification Guidelines
Table 44.1 shows identification guidelinetioned before, two trendlines outline thedownward, with the top trendline havingEventually, the two trendlines intersect atthe wedge pictured in Figure 44.2. This wepattern in an uptrend. Prices oscillate frotimes before breaking out of the narrowinI usually regard five touches as thegood formation. The reason for the multicreates several minor highs and minor lothan the last. Having a five-touch minimresembles a rise and gradual decline fromneeds to be several, opposing, touchesthrough the formation. For example, Figtrendlines, five of which occur on the oppThe minor highs and lows are descesloping trendlines outlining the minor higrect identification of a falling wedge. Avbottom trendline as the formation is mosfalling wedge, both trendlines must slope dTaken together, the wedge should haand seldom does it last over 4 or 5 month
Table 44Identification Characteristic
Apr 92
May
]un
Figure 44.1
Aug
Sep
Oct
Nov
Characteristic
Discussion
Two down-sloping trendlines
Draw two talong the bdownward
Multiple touches
Most formaalong oneof formatio
Three-week minimum
A falling weAnything lerarely exce
Volume trend
Volume us
Dec
A falling wedge bounded by two down-sloping trendlines.
606
Wedges, Falling
Focus on Failures
Boatmens Bancshares (Bank, NASDAQ, BOAT)
607
Focus on FailuresIn a perfect world there are no failures, but even with a 10% failure rate, youoccasionally come across one. Like many formations, falling wedges have twotypes of failures. The first I call a 5% failure (see Figure 44.3). The fallingwedge acts as a reversal of the upward trend. Although not shown on the chart,prices began rising in early December 1994. During creation of the chart pattern, prices move lower in a narrowing channel. After the breakout, pricesclimb and reach a high of 453/8, less than 5% above the breakout price of 43H.From the high, prices head down and reach the ultimate low in late October ata price of 36%. The inability of prices to continue rising more than 5% after a
breakout constitutes a 5% failure. In the 125 formations studied, only two suffer 5% failures. The others are failures such as that shown in Figure 44.4.Of the 12 failures found in this study, 10 are of the variety shown in Figure 44.4. Prices break out downward and continue down. If you could zoomaway from the chart, you might recognize a large head-and-shoulders formaFeb 93
Mar
Apr
May
Jun
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Aug
Sep
Oct
Nov
Figure 44.2 A falling wedge with six trendline touches. Several alternating touchesof the trendlines are needed to form a reliable falling wedge.
tion with each shoulder and head lasting from 3 to 4 months. The chart showsthe rounded-appearing right shoulder. The latter part of the shoulder takes onthe appearance of a falling wedge.The top trendline is sloping more steeply than the lower one. Together,they both slope downward and eventually join some distance to the right.
example, have durations