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
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.
|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.