DEFINITION of Multiple Tops
Multiple tops is a reversal chart pattern that shows the failure of a security to break through to new highs on two or more occasions, and is therefore considered a sell signal of the security. Multiple tops can be 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.
BREAKING DOWN Multiple Tops
Note that 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.
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.
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.<br/>