Fly Fishing the Stock Market: How to Search for, Catch, and Net the Market's Best Trades

TOP PATTERNS

This pattern is easy to recognize. Along with bottoming patterns, topping patterns form at market extremes, are usually associated with divergences of trend-following indicators, and occasionally accompany exhaustive moves.

Figure 8.15 illustrates the technical formation of this pattern in the SPY.

FIGURE 8.15 The market rolls over from a double top.

SPY, daily, indicator set #8.   • A severe sell-off develops following a double top with a bearish divergence of the MACD lines (A–B).   • Prices break down, causing the EMAs to turn down rapidly (area C).   • Downside volume ramps up as panic sets in, blowing prices down and out of their price channel (bar D).

The following are the basic elements of the top pattern:

• Momentum begins to weaken, represented by bearish divergences of the indicators (A–B).
• Up thrust of prices diminishes (area B), causing price bar shortening as well as flattening of the moving averages.
• Often, a bearish engulfing bar or upside false breakout will cap the top, signaling lower prices (area B).
• Some event or technical feature, such as the tracing of a double top (A–B), leads to a severe price sell-off.
• Prices drop through support (area C).
• EMAs turn down; the fast falls below the slow, and the slow falls below the 50-day EMA (area C).

Trading Tactic

The most effective approach to trading a market that is topping is to use tactics that catch ...