What Are Multiple Tops?
Multiple tops refer to a reversal chart pattern looked at by technical traders. Multiple tops occur when a security fails to break through to new highs on two or more occasions. This trend is interpreted as a signal to sell the particular security.
- Multiple tops refer to a reversal pattern used by professional traders who are looking for signals to sell or short the security they are tracking.
- In this pattern, a top occurs when the security hits a high or an end of an uptrend that then loses momentum and moves back down until it hits a lower support level where it stabilizes before making a move higher again.
- Multiple tops occur when the security hits this high in roughly the same area several times a day or weeks apart.
- The pattern is said to be established when the security hits the high point and fails to sustain it two or three times.
- Eventually, the security will be pushed through the lower support level established, confirming the presence of the multiple tops pattern.
Understanding Multiple Tops
Multiple tops can be a reference to double or triple tops. A multiple top usually develops at the end of an uptrend in a security or index. As the uptrend fades out in the same general area many days or weeks apart, the security falls back on each occasion and establishes a support level, which is the price level at which the bulls shore it up. If it continues to fail to break through the stiff resistance offered by the multiple top region, at some point, the bears will succeed in pushing it below the support level. The downside break of this support level would be conclusive evidence of the multiple-top pattern formation.
Notably, multiple tops do not have to be formed at the exact same price. Chartists consider acceptable multiple tops formed at price points as much as 3% apart.
How Multiple Tops Works
Traders would generally sell short the security on the downside break of the support level. Short selling may be facilitated at this time by the significantly higher trading volume that generally accompanies the downside break. The profit objective of this short sale usually equals the difference between the multiple top region and the support area.
Example of Multiple Tops
For example, if a stock forms a triple top around $15, and has retreated to around $12.50 after each failed attempt at new highs, the short sale would be entered into on a downside break of the $12.50 support level. The profit objective equals the $2.50 difference between the triple top and support level (i.e., $15.00 - $12.50). This means that the trader would have a price target of $10 on the short sale, for a profit objective of $2.50 ($12.50 - $2.50).
Of course, aggressive traders who are particularly bearish on the stock may not wait for the downside break at $12.50 to short it. They may enter into the short sale after the stock has failed to break through $15 for the third time, rather than wait for confirmation of the sell signal on the downside break at $12.50.