When a stock has been steadily climbing but can't seem to get past a certain level, it stands a risk of experiencing a multiple top, which can precede a meaningful drop in price. The top can range from just two similar, widely spaced high prices (a double top) up to many similar price levels. When those subsequent high price levels become a little lower each time, it suggests even more strongly that the stock is about to change direction, since the buying strength is waning.
DEFINITION OF THE PATTERN
The first requirement of a multiple top is that the stock has to have experienced a sustained increase in price. The premise of a multiple top is that the stock has already enjoyed a healthy inflation in price, and a selling (or shorting) opportunity has been forming for a while at current lofty levels.
Just because a stock ascends to a certain level a number of times doesn't mean it is forming a top. Those instances should:
- Have significant amounts of time between them.
- Experience failed attempts at dropping before rising back again.
- Ideally, exhibit diminishing amounts of volume with each instance of hitting the high.
The amount of time between highs might be many weeks, several months, or even several years. If you look at a daily chart of a stock, you will want to see large gaps between these high prices as the stock tries—and fails—to push its way higher at least a couple of instances.
As the pattern is forming, what you ideally want to see is a generally ...