Triple Tops and Bottoms: The Ultimate Test of Support and Resistance for Exp20

Introduction

In the world of technical analysis, the triple top and triple bottom patterns represent the ultimate test of a support or resistance level. These rare but effective reversal patterns signal a prolonged struggle between buyers and sellers, with the eventual victor initiating a significant and often sustained trend. For the professional trader, the ability to identify and interpret these formations is a mark of a seasoned chartist, offering the potential for high-conviction trades with well-defined risk parameters.

The Triple Top Pattern

The triple top is a bearish reversal pattern that forms at the end of an uptrend. It is characterized by three consecutive peaks at approximately the same price level, separated by two moderate troughs. The pattern indicates that despite repeated attempts, the buyers are unable to push the price through a strong resistance level, and the sellers are gradually gaining control.

Formation

1. Three Peaks: The price rallies to a resistance level three times, but fails to break through on each attempt.
2. Two Troughs: The price retraces from the resistance level twice, forming two troughs.
3. Neckline: A horizontal line is drawn at the level of the troughs. The breakdown below this neckline confirms the pattern.

Volume

Volume tends to decrease with each successive peak, indicating waning buying pressure. A significant increase in volume on the neckline break is a strong confirmation of the reversal.

The Triple Bottom Pattern

The triple bottom is the bullish counterpart to the triple top, forming at the end of a downtrend. It consists of three consecutive troughs at roughly the same price level, separated by two moderate peaks. This pattern suggests that despite repeated attempts, the sellers are unable to push the price through a strong support level, and the buyers are gradually gaining the upper hand.

Formation

1. Three Troughs: The price declines to a support level three times, but fails to break through on each attempt.
2. Two Peaks: The price rallies from the support level twice, forming two peaks.
3. Neckline: A horizontal line is drawn at the level of the peaks. The breakout above this neckline confirms the pattern.

Volume

Volume is often highest on the first trough and tends to diminish on the subsequent troughs. A surge in volume on the neckline breakout is a strong bullish signal.

Price Objective Formula

The price objective for both patterns is calculated by measuring the distance from the neckline to the peaks (for a triple top) or troughs (for a triple bottom) and projecting that distance from the breakout point.

Price Objective (Triple Top) = Neckline Breakout Price - (Peak Price - Neckline Price)
Price Objective (Triple Bottom) = Neckline Breakout Price + (Neckline Price - Trough Price)

Price Objective (Triple Top) = Neckline Breakout Price - (Peak Price - Neckline Price)
Price Objective (Triple Bottom) = Neckline Breakout Price + (Neckline Price - Trough Price)

Example Data Table

Consider the following hypothetical data for a triple bottom pattern:

The neckline is at $46. The price objective would be:

Price Objective = 47 + (46 - 40.33) = 47 + 5.67 = 52.67

Conclusion

Triple tops and bottoms are rare but effective reversal patterns that can signal a major shift in market sentiment. Their extended formation provides ample time for traders to assess the situation and plan their trades. By waiting for a confirmed breakout or breakdown on high volume, traders can enter the market with a high degree of confidence and a clear price objective. Mastering these patterns is a evidence to a trader's patience and discipline, and can lead to some of the most profitable trades of their career.