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Cardinal Reversal Patterns - At Tops
6. The Broadening Top
The Broadening top is a relatively rare formation
that looks like an inverted triangle. Instead of increasingly narrowing
fluctuations in prices, the broadening formation is formed by price swings
that are increasingly widening. The most common of these patterns,
shown below, consists of three successively higher peaks and another line
connecting the two lows combine to give the price formation its distinctive
pattern.
An additional difference between this formation and the triangle is
the change in volume. Whereas volume contracts with the triangle,
indicating investor indecision, volume in the broadening top usually expands
right along with prices, indicating a volatile emotional market. The combination of wide price swings and increasing volume implies a frenzied
market that's out of control, symptoms of market tops rather than bottoms. As a result, these patterns are rarely found at market bottoms.
THE BROADENING TOP. The Broadening top usually
consists of three ascending peaks and two descending troughs. The
completion of the formation and signaling of the top occur when the price
violates the second of these two troughs.
The signal that the market has topped occurs when prices fall below the
lower low. Prices may again test the third peak but usually don't
exceed that level. In addition, in some cases, the third peak might
not actually exceed the second peak before prices drop and fall below the
second low, providing an early indication that the market is topping. The broadening top is considered complete once this violation of the second low is made.
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