What Are the Topping Stock Formations? - Candlestick Patterns Explained by TechniTrader®

Lists of Classic and Trend Timeframe Tops

One of the most important aspects of learning to read stock charts and using Technical Analysis is to remember that the Market Structure is changing and evolving over time. Sometimes these changes are very slow, while at other times the evolution is occurring at a rapid pace. In the past 5 years, the pace of change has been accelerating, and it continues to move at an ever-increasing level.

Therefore, new and novice Individual Investors and Retail Traders need to be aware that all of the older books, articles, and information on the internet as well as in bookstores can be studied, but they also should be accepted as being outdated.

The Topping Stock Formations of candlestick patterns that are developing in the market reflect the fact that 70%–80% of all the Market Orders are now automated. What this means is that most of the orders are triggered by a computer. Market Makers used to be humans that made the market by filling orders when there was no counter order. Now, most of the Market Maker orders are fully automated.

Computer-generated and matched orders create different technical patterns including topping formations than human-initiated and typed-in orders to the market.

In addition, the increased use of Alternative Trading System (ATS) platforms by the giant Buy Side Institutions creating Dark Pools, High Frequency Traders’ (HFTs’) Algorithmic Trading, Electronic Communication Networks (ECNs), and 16 different US Stock Exchanges create a far more dynamic Stock Market than what was present just a few years ago.

To start understanding Topping Stock Formation action, a new or novice Individual Investor or Retail Trader must learn the original classic topping formations. Then, they must learn the new topping formations of the automated marketplace. When both are learned, the new Individual Investor or beginner Retail Trader is prepared to use stock charts and Technical Analysis to the fullest advantage and success.

The Original Topping Formations and Candlestick Patterns:

A topping formation occurs when a stock has been moving up for a long period of time and speculation has entered the price action. Often, stock prices will go vertical with huge gains or shrinking price action just before a topping pattern begins. Tops often take a long time to form because most investors and traders don’t want to believe that the uptrend is over. Latecomers frequently buy a stock that is topping when it “dips” in price. This is because they are unaware of the fact that the stock has reached the end of its long-term or intermediate-term uptrend and needs to correct by moving down.

This late buying causes tops to form over an extended period of time with a variety of topping patterns. Sometimes a top comes swiftly and the price collapses, but it usually takes a while. Regardless of trading or investing styles, being able to recognize topping formations early will help keep more profits by exiting before the stock falls.

The Four Original Classic Textbook Topping Formations are:

The Inverted V Top is the opposite of a Bottoming Stock V. The Inverted V Top occurs when a stock has been running up so fast that it does not develop any viable support levels. It suddenly peaks and forms a Sheer Cliff drop on the other side. These often have gap downs, and the runs are so fast downward that they can be tough to catch. Inverted V Tops are rarer now due to how High Frequency Trading activity controls most topping formations.
The Double Top is an Inverted W or what is usually called an “M Top”. This is where the stock reaches a high, retraces, and then moves up again. However, it is unable to move beyond the original previous high to continue up, and then it proceeds to move down again. The confirmation that a reversal of trend has occurred is when the price of the stock violates the lows of the M Formation. Double Tops are not topping formations until the reversal is signaled. Double Tops can easily turn into a longer-term sideways candlestick pattern that meanders up and down within that price range, so confirmation of price is critical. Also, Double or M Tops are less common and rarely form on long-term trends. With the automated market, most M Tops are seen only on the short-term trend.
Triple Tops and Head & Shoulders are basically that the Head & Shoulders Topping Stock Formation is a variation of the Triple Top. Head & Shoulders Topping Formations are exceedingly rare nowadays. Triple Tops are also quite rare. The rule for Head & Shoulders is that it must break the neckline, which is the low between the shoulders. The neckline can be horizontal or angled, and neither makes any significant difference in the success of the downside formation. The head should be formed on weaker upside stock Volume, the right shoulder should form on still weaker upside stock Volume, and the break to the downside should form with strong red or downside stock Volume Indicator bars. These tops are very rare nowadays due to how the Giant Funds use Alternative Trading Systems to slowly sell out of a stock long before it runs up speculatively. The Head & Shoulders Formation peak fails to form often, as High Frequency Traders trigger massive collapsing sell-offs on sudden news events. Since High Frequency Traders are mostly one-day events, the “Head” that used to form no longer does because there is no continuation after the huge one-day stock Volume Indicator surge and speculative price intraday action.
The Rounding Top is the opposite of the Rounding Bottom and is very ominous and reliable. Rounding Tops usually form slowly, giving the holder time to exit. They can be short-term or long-term formations. The Rounding Top used to be less common, but it is now forming on all 3 trends: The long-term trend (aka primary trend), the intermediate-term trend, and even the short-term trend. The Rounding Topping Stock Formation is harder to identify early on, but it is a pattern all investors and traders need to learn and identify as early as possible in order to protect more profits. The Rounding Top can fall quickly, and it has less support on the way down to prior lows.

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Trade Wisely,

Martha Stokes CMT

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses