The “Tower Top Pattern,” also known simply as the “Tower Pattern,” is a chart pattern used in technical analysis to identify potential reversals in the price of an asset. This pattern is less common than other patterns but can be a powerful signal when it appears. It is typically found in candlestick charts.
Characteristics of the Tower Top Pattern
- Formation:
- The pattern forms after a strong uptrend.
- It consists of a series of candlesticks that create a structure resembling a tower with a flat or rounded top.
- Components:
- Strong Uptrend: The pattern is preceded by a significant upward price movement.
- Consolidation at the Top: After the uptrend, the price consolidates, forming a series of small-bodied candlesticks (doji or spinning tops) that indicate indecision and potential reversal.
- Bearish Candlestick: The pattern is confirmed by a large bearish candlestick that breaks below the consolidation range, signaling the start of a downtrend.
- Volume:
- Volume often decreases during the consolidation phase, indicating weakening bullish momentum.
- A spike in volume on the bearish candlestick can further confirm the reversal.
Interpretation and Trading Strategy
- Confirmation:
- Traders typically wait for the bearish candlestick to close below the consolidation range to confirm the pattern.
- Additional indicators such as moving averages, RSI (Relative Strength Index), or MACD (Moving Average Convergence Divergence) can be used to validate the signal.
- Entry Point:
- A short position can be entered once the bearish candlestick closes below the support level of the consolidation range.
- Some traders may wait for a pullback to the broken support level (now acting as resistance) before entering the trade.
- Stop Loss:
- A stop loss can be placed above the highest point of the consolidation range to limit potential losses.
- Profit Target:
- The profit target can be set based on the previous support levels or by using a measured move technique, where the height of the consolidation range is projected downward from the breakout point.
Example
Let’s consider an example where a stock has been in a strong uptrend and starts forming small-bodied candlesticks at the top, creating a flat top structure. After a few days of consolidation, a large bearish candlestick appears and closes below the consolidation range. This indicates that the uptrend has exhausted, and a reversal might be imminent. Traders who recognize this pattern might enter a short position, set a stop loss above the consolidation range, and aim for a profit target based on previous support levels.
Summary
The Tower Top Pattern is a bearish reversal pattern that signals the end of an uptrend and the beginning of a downtrend. By identifying the consolidation phase and waiting for the bearish confirmation candlestick, traders can potentially capitalize on the ensuing price decline. As with all technical patterns, it’s important to use additional analysis and risk management strategies to enhance the effectiveness of the trade.
