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TradingDay.com > Technical Analysis Tutorial

T e c h n i c a l   A n a l y s i s   T u t o r i a l
by Alan Farley

Adam and Eve Tops

Stock charts print many unique topping formations. Some classics, such as the Descending Triangle, 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 violated.

Do you recall the Adam & Eve Bottom, featured earlier in this column? This unique formation consists of a spiking first bottom, followed by a rounded second one. Flip the pattern over and you'll find a highly predictive structure for trading these topping reversals.

This simple Adam & Eve Top provides traders with frequent high profit short sales opportunities. Note this classic pattern in Quantum's chart. Price never drew a third high before entering a significant bear market. Successful A&E short sales can be entered on the first violation of the reaction low, regardless of an underlying trend. However, 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. Then the slow dome of Eve absorbs the remaining bull impulse while dissipating volatility needed to resume a rally. As the dome completes, price moves swiftly to lower levels without substantial resistance.

Observant technicians will recognize the mechanics of Descending Triangles and Adam & Eve formations in more complex reversals. The vast majority of tops contain some 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.

QNTM
Quantum's 1997 multi-year high breaks down in a dramatic Adam and Eve Top. Look for both volume and volatility readings to decline gradually through the formation of the second rounded high. Most times, this "Eve" consumes more price bars than the "Adam" that precedes it.
 


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