Common top patterns
1. Double top pattern
The double top pattern is a signal in technical analysis that usually appears at high price levels. When the price experiences two consecutive days with upper shadows (i.e., the price rises and then falls back), especially when one of those upper shadows is accompanied by a significantly large trading volume, it often indicates that the price may have reached a short-term high. One should avoid blindly chasing higher prices; instead, we should be aware of the risks, as a decline may follow, and investors should consider selling at this time. If combined with the trend of the third candlestick (such as continuing to decline or weaken), the judgment will be more accurate. In simple terms, seeing this pattern should raise caution, as it may be a selling signal.
2. Huge long upper shadow
A huge long upper shadow is a dangerous signal. If the trading volume of a stock suddenly surges (for example, more than twice the usual amount), but the price rises and then falls back, forming an upper shadow or a large bearish candlestick, it usually indicates that the price may have reached a short-term top, and it is very likely to decline next. At this time, investors should be cautious, consider selling, and avoid being trapped by the subsequent decline. In simple terms, seeing this signal should raise caution, as it may be time to exit.
The safest approach is to wait for a rebound that does not break the previous high and then go short.
3. High M head
The double top pattern occurs after the market rises to a certain stage, featuring two peaks known as the left peak and the right peak. Theoretically, both peaks should be roughly the same height, but in practice, the left peak is usually slightly lower than the right peak. This is because after the first decline, there are funds attempting to push prices higher again but fail to break through the height of the left peak. At this point, we draw a horizontal line at the low point of the first decline, which is known as the neck line.
When the market rises again and then falls back, and the candlestick body breaks below the neck line, the double top pattern is officially formed. After formation, the market may experience a pullback (i.e., a slight rebound), but the strength of the rebound is usually weak, and the neck line will act as resistance. After the pullback ends, the market often accelerates downward. In simple terms, seeing this pattern should raise vigilance, as it may be a signal of decline.
4. High head and shoulders top pattern
The head and shoulders top pattern consists of the left shoulder, head, right shoulder, and neck line. When the price breaks below the neck line, it indicates that the head and shoulders top pattern is complete, and the trend is likely to reverse from upward to downward.
For example: In a rising trend, the high point on the left forms the left shoulder, then the price reaches a new high, forming the head, and then it falls back and rebounds again, forming the right shoulder. The formation of the right shoulder indicates the beginning of the downward trend structure. The price forms a neck line at almost the same low point, which is the key support line of the upward trend. When the price breaks below the neck line, it means that the upward trend is likely to reverse into a downward trend.
The principle of the head and shoulders top pattern is: in an upward trend, the price reverses from high high (increasing highs) to high low (decreasing highs), indicating that buyer momentum is weakening. When the price breaks below the neck line and forms low low (decreasing lows), the downward trend structure is officially established, indicating that the upward trend is likely ending and the downward trend is beginning. In simple terms, seeing this pattern should raise vigilance, as it may be a signal of decline.
